As Canada embarks on a monetary easing cycle, the appeal of dividend stocks is returning to the spotlight. While lower interest rates can boost the attractiveness of these equities by reducing discount rates and borrowing costs, they may also signal an economic slowdown that pressures corporate cash flows. This environment underscores the importance of selecting companies with resilient fundamentals and sustainable payouts.
Here are three Toronto Stock Exchange (TSX) dividend stocks positioned to potentially benefit as rates decline.
Choice Properties REIT (TSX:CHP.UN) focuses on mixed-use properties, with a portfolio heavily weighted towards retail assets anchored by major grocers like Loblaw and well-located industrial properties. Its second-quarter earnings reported a high occupancy rate of 97.8%, providing a stable stream of cash flow.
A lower-rate environment is expected to reduce its borrowing costs and compress capitalization rates, potentially boosting its net asset value (NAV) per share, currently at $14.38. Furthermore, the REIT maintains ample liquidity, supported by $1.3 billion in available credit facilities and a pool of $13.5 billion in unencumbered properties. Investors may find its dividend coverage, as measured by adjusted funds from operations (AFFO), improving as financing expenses ease.
This aerospace and manufacturing company pursues growth primarily through acquisitions. Lower interest rates would directly benefit its strategy by reducing financing costs for future acquisitions and its existing fleet. The company posted a record quarterly revenue in Q2, with adjusted EBITDA reaching $177 million and free cash flow of $123 million. While economic weakness could dampen demand, the recent acquisition of Canadian North, which comes with long-term contracts, helps mitigate this risk. Cheaper financing is set to improve the economics of its acquisition pipeline and bolster the sustainability of its dividend.
Pembina Pipeline, a midstream energy company, derives substantial stability from cash flows backed by long-term contracts. Lower rates are poised to cut its variable debt interest expenses and project financing costs, thereby enhancing returns on existing assets.
The company generated strong Q2 results, with adjusted EBITDA of $1 billion and adjusted cash flow from operating activities of $698 million. This robust cash generation adequately covers its dividend payments and capital expenditures. In a low-rate setting, its contracted cash flows, combined with a lower discount rate, could lift asset valuations, providing firm support for its attractive dividend yield.
While all three companies stand to gain from lower financing costs and potential asset appreciation, investors should remain cautious. A significant economic downturn that impairs operational cash flows could still threaten dividend payouts. As always, integrating these picks into a portfolio should align with individual risk tolerance and financial objectives.
