The Stock Market’s Resurgence: A Golden Opportunity for Income Investors
As the stock market begins to regain its footing, buoyed by falling interest rates, investors are witnessing a shift in momentum. Growth stocks have been quick to capitalize on this resurgence, but many income stocks remain undervalued, lingering near multi-year lows. This discrepancy presents a unique opportunity for savvy investors to capitalize on the current market conditions.
A Once-in-a-Decade Opportunity
The current market landscape offers a rare chance to buy into income stocks at discounted prices, allowing investors to lock in higher dividend yields for the long term. This combination of attractive yields and potential stock price recovery could significantly enhance your passive income portfolio.
Spotlight on Telus Stock
One standout in the income stock arena is Telus (TSX:T). This telecommunications giant has strong fundamentals but has been undervalued due to short-term challenges. The telecom sector has recently undergone significant consolidation, particularly following the Rogers and Shaw merger, which has led to a new market equilibrium.
Telus has been aggressively investing in 5G infrastructure, resulting in a surge in capital expenditures during a period when interest rates were at a decade high. Consequently, Telus’s stock price has plummeted to levels not seen since 2016, hovering around $20.
With a hefty debt load of $28.15 billion, Telus has faced substantial interest expenses, amounting to $1.33 billion annually. This financial burden has impacted its cash flows and net income, pushing its dividend payout ratio to 83% as of June 2024, surpassing its target range of 60-75%.
However, the tide may be turning. The Bank of Canada’s swift interest rate cuts could alleviate some of this financial pressure, enhancing Telus’s net profit. Furthermore, the ongoing rollout of 5G technology and investments in artificial intelligence (AI) are poised to create new revenue streams, particularly in the cloud sector.
Investors might consider making a lump-sum investment in Telus to secure a robust annual dividend yield of 6.8%. Additionally, Telus offers a dividend-reinvestment plan (DRIP) that could be particularly appealing for those with a long-term investment horizon. The company aims to grow its dividend by 7% annually, with incremental increases every six months. Given that the opportunities presented by 5G technology far exceed those of 4G, Telus is well-positioned for dividend growth over the next decade.
RioCan REIT: A Solid Income Stock
Another compelling income stock to consider is RioCan REIT (TSX:REI.UN). While its dividend history may not be the most impressive, RioCan boasts a diversified property portfolio with a tenant base that mitigates risk—no single tenant accounts for more than 5% of its rental income.
During the pandemic, RioCan had to cut its dividend due to the impact of lockdowns on rent collection. However, the revised distributions have resulted in a more sustainable payout ratio of 61.5% of funds from operations.
RioCan is strategically positioned to benefit from a bull market, as a significant portion of its properties are located in the Greater Toronto Area, known for attracting higher rents. While grocery stores may not command premium rents, specialty retailers do, providing a balanced income stream for the REIT.
Currently, the market undervalues RioCan’s units, trading at $20.50, while the book value of its assets suggests a worth of $25.02 per unit. The REIT’s unit price remains below pre-pandemic levels of $26-$28, indicating potential for capital appreciation as the property market rebounds. By investing in RioCan now, you can secure a 5.45% yield along with a promising opportunity for capital appreciation of 30-36%.
Investor Takeaway
Investors looking for income stocks have a unique opportunity to enhance their portfolios with Telus and RioCan. Telus offers the potential for compounded returns through its DRIP and dividend growth, while RioCan provides avenues for capital appreciation alongside modest dividend growth.
As the market continues to evolve, these income stocks may serve as valuable additions to a well-rounded investment strategy, positioning investors for long-term success.
Additional Insights
Before diving into investments like RioCan, it’s worth noting that The Motley Fool’s Stock Advisor Canada analyst team has identified ten stocks they believe are primed for significant returns, and RioCan is not among them. For instance, MercadoLibre, recommended back in January 2014, has yielded extraordinary returns for early investors.
The Stock Advisor Canada service offers a comprehensive approach to investing, providing guidance on portfolio building, regular analyst updates, and two new stock picks each month—one from Canada and one from the U.S. This service has consistently outperformed the S&P/TSX Composite Index, making it a valuable resource for investors seeking to navigate the stock market effectively.
For those considering their next investment moves, the current market conditions present a compelling case for exploring income stocks like Telus and RioCan, while also keeping an eye on broader opportunities identified by investment experts.