Investing in High-Yield Dividend Stocks amidst Interest Rate UncertaintyInvesting in High-Yield Dividend Stocks amidst Interest Rate Uncertainty In recent years, capital-intensive companies, such as those in the energy and telecommunications sectors, have faced pressure due to high interest rates. However, as inflation shows signs of moderating, central banks are expected to lower interest rates before the end of the year, which will provide a tailwind for these businesses. Enbridge: A Diversified Energy Powerhouse Enbridge (TSX: ENB) is a diversified energy company with operations in oil and natural gas transportation, natural gas utilities, and renewable energy. Its capital-intensive nature has made it susceptible to interest rate fluctuations. However, the company’s recent price correction has made it an attractive investment at its current NTM price-to-earnings ratio of 16.2. Enbridge’s highly contracted business and inflation-indexing provide stability to its cash flows. The company has a consistent track record of dividend growth, with a CAGR of 10% over the past 29 years. Its current forward dividend yield of 7.6% is highly attractive. Enbridge’s secured capital program of $25 billion, combined with its optimization initiatives, is expected to drive 3-5% annual growth. Strategic acquisitions, such as the recent acquisition of natural gas assets from Dominion Energy, could further enhance Enbridge’s position in the industry. B.C.: A Telecom Giant Underpriced The telecommunications sector has faced challenges in recent years due to high interest rates and regulatory policies. B.C. (TSX: BCE), one of the top telecom providers in Canada, has seen its share value decline by more than 40% from its 2022 highs. As a result, its NTM price-to-sales and price-to-earnings multiples have dropped to 1.6 and 14.4, respectively. Despite these challenges, B.C. benefits from recurring revenue streams, providing it with healthy cash flows. The company has increased its dividend for 16 consecutive years, resulting in a current forward dividend yield of 9.3%. B.C. is investing in 5G infrastructure and offering bundled deals to expand its customer base. Despite some temporary headwinds, the company’s focus on cost reduction and its strong brand position make it a compelling investment at these discounted prices.
Stocks with capital-intensive businesses have been under pressure in recent years due to a high interest rate environment. With inflation showing signs of abating, we can expect central banks to cut interest rates before the end of this year, which will benefit capital-intensive businesses. Meanwhile, the following two high-yield dividend stocks are trading at lower valuations, making them attractive buys.
Enbridge
Enbridge (TSX:ENB) is a diversified energy company that transports oil and natural gas across North America. It also has a strong presence in the natural gas utilities and renewable energy sectors. Given its capital-intensive business, rising interest rates have weighed on the stock price, with the company losing about 19% of its share value compared to its 2022 highs. The correction has dragged down its valuation, with its NTM (trailing 12 months) price-to-earnings ratio at 16.2.
Enbridge operates a highly contracted business, with about 98% of its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) generated from cost-of-service contracts. Furthermore, about 80% of its EBITDA is indexed for inflation, which provides protection against rising prices. As a diversified energy company, it generates steady cash flows, allowing it to consistently increase its dividend. Over the past 29 years, the company has increased its dividend at a CAGR (compound annual growth rate) of 10%. Furthermore, its forward dividend yield is a juicy 7.6%.
Enbridge is also continuing its $25 billion secured capital program, investing $6 billion to $7 billion annually. These investments could expand its midstream, utility and renewable asset base, generating 3% annual growth. Additionally, its optimization and cost-saving initiatives could generate an additional 1% to 2% growth. In addition to organic growth, the company is also focusing on strategic acquisitions. It has acquired two natural gas assets from Dominion Energy and is working to close a third deal. These acquisitions could make the company the largest natural gas company in North America. Increasing revenues from low-risk utilities could further stabilize Enbridge’s finances, making future dividend payments more secure.
B.C.
The telecom sector has been under pressure over the past two years due to high interest rates and unfavorable regulatory policies. B.C. (TSX:BCE), one of the top three players in the sector, has lost more than 40% of its share value from its 2022 highs. The steep correction has dragged down its valuation, with its NTM price-to-sales and NTM price-to-earnings multiples at 1.6 and 14.4, respectively.
Meanwhile, telecom companies enjoy healthy cash flows thanks to recurring revenue streams. Backed by these stable cash flows, BCE has increased its dividends for 16 consecutive years, while its forward dividend yield has risen to an impressive 9.3%.
Amid digitalization and growth in remote working and learning, telecommunication services have become essential. BCE continues to expand its 5G infrastructure and offer attractive bundled deals, expanding its customer base. Mobile customer base grew 3.1% in the quarter ended March, while ARPU (average revenue per user) remained unchanged.
Furthermore, the company has drastically reduced its capital expenditures in loss-making assets and has undertaken workforce restructuring initiatives to improve its profitability. So despite the short-term weakness, I think BCE would be an excellent buy at these levels.
