Dividend stocks vs GICs
In the good old days, GICs, government bonds, and even savings accounts earned enough interest to avoid taking on the risk of stocks. In recent years, however, interest rates and bond yields have fallen dramatically. This trend accelerated in 2020, as financial markets responded to the pandemic.
Inflation could creep in and start pushing rates up over the next few years, but there’s no guarantee if or when that will happen. As a result, dividend-paying stocks might be the best game in town for decent returns for a while.
Best dividend-paying stocks
In today’s environment, it makes sense to buy stocks with low beta. This means that their stock prices tend to hold up well when the wider stock market is affected. Business specific issues can certainly trigger big moves both ways, but the goal is to buy low risk businesses.
Ideally, businesses derive a large portion of their income from recession-resistant operations. Stable cash flow supports existing dividends during tough times and helps stimulate dividend growth when the economy recovers.
Let’s take a look at Fortis (TSX: FTS) (NYSE: FTS) et Telus (TSX: T) (NYSE: TU) to see why they might be good choices for an income-oriented portfolio.
Fortis is a Canadian utility company with $ 57 billion in assets located in Canada, the United States and the Caribbean.
The strong US presence gives Canadian investors decent exposure to the US economy through Canadian stock. This is useful when stocks are held in a TFSA to ensure that all dividends remain tax free.
Fortis derives most of its income from regulated companies. Power generation, power transmission, and natural gas distribution all provide regular cash flow. Pandemic lockdowns in 2020 reduced electricity use by commercial customers, but this is partly offset by increased use by homeowners. As the economy reopens, conditions should normalize.
Fortis has an extensive capital program underway which will significantly increase the rate base over the next several years. As a result, cash flow is expected to increase at a steady rate and the board intends to increase the dividend by approximately 6% per year through 2024.
The current dividend offers a yield of 3.6%.
Telus is a major player in the Canadian communications industry. The company provides mobile, Internet and TV services to its customers over its world-class wireless and wireline networks.
Telus does not own any media assets. This means the company has avoided some of the pain endured by its two biggest competitors in recent months.
Instead of spending a lot of money on sports teams, TV networks, and radio stations, Telus has invested heavily in its digital health business in recent years. Telus Health was truly in the spotlight in 2020. Pandemic restrictions have seen many healthcare professionals embrace Telus Health solutions to keep connected with their patients. The digital disruption in the healthcare industry is just beginning, and Telus Health is a leader in the Canadian market.
Telus has a strong track record of dividend growth and investors should see this trend continue. At the time of writing, the cast is offering a 4.75% return.
The bottom line
Fortis and Telus are blue chip companies delivering reliable dividends backed by recession resistant companies. If you’re looking for income stocks that don’t keep you awake at night, these names are worth being on your radar.
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The Motley Fool recommends FORTIS INC. Fool contributor Andrew Walker owns shares in Fortis.