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With the Bank of Canada signalling more rate cuts are on the way, and the Federal Reserve expected to pivot at its next meeting, analysts see a comeback story in the making for dividend stocks.
The post-COVID rate spike stoked investor interest in short-term fixed income products, like term deposits and guaranteed investment certificates (GICs). High-yielding Canadian equities fell out of favour as the risk equation changed. CIBC Capital Markets estimates there is roughly $220 billion in “excess” funds that Canadian investors have shifted into fixed income.
“With rates now heading lower, we expect to see continued rotation from these fixed income products into high-yielding Canadian equities, resulting in outperformance for REITs (real estate investment trusts), utilities, telecoms and financials,” CIBC analyst Ian de Verteuil wrote in a note to clients prior to the Bank of Canada’s latest rate decision. “If interest rates fall as we expect, what was a material headwind should turn by 180 degrees.”
de Verteuil predicts financial sector stocks will be the biggest winners. He notes that second-quarter financial results from Canada’s largest banks showed strength, even as institutions put aside more money for credit losses.
“The financials offer the clearest outlook,” de Verteuil wrote. “Telecoms are certainly experiencing elevated levels of competition, and a changing regulatory environment. Some REITs are facing a less positive outlook given the long-term effects of COVID on work and consumption. Utilities are dealing with a shift in the types of power generation.”
He notes the life insurance companies have been strong performers throughout the changing interest rate environment.
The Bank of Canada delivered back-to-back 25 basis point rate cuts in June and July. On Wednesday, it announced a 25 basis point reduction, while signalling more cuts are on the way, if inflation falls as expected.
Last week, RBC Capital Markets analyst Maurice Choy said utilities stocks have already been helped by a “favourable interest rate environment.” He has “outperform” ratings on Emera (EMA.TO) and TransAlta (TA.TO).
At the same time, TD Cowen analyst Sam Damiani called for the lagging REIT sector to rebound as interest rates fall. His top picks are Granite Real Estate Investment Trust (GRT-UN.TO), Chartwell Retirement Residences (CSH-UN.TO), and Canadian Apartment Properties REIT (CAR-UN.TO).
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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