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1 Dividend Stock to Buy if the Bank of Canada Keeps Cutting Rates

A worker drinks out of a mug in an office.
Source: Getty Images

Written by Amy Legate-Wolfe at The Motley Fool Canada

Picture this: the economy has been having a bit of a rollercoaster ride lately. You know how sometimes you hit a rough patch and need to slow down a bit to avoid a spill? Well, that’s kind of what the Bank of Canada did with interest rates.

The idea behind cutting interest rates is to give the economy a little nudge in the right direction. Lower rates mean cheaper borrowing for businesses and consumers, which can lead to more spending and investment. It’s like giving the economy a gentle push to help it pick up speed again.

Now, should the Bank of Canada keep cutting rates? That’s where it gets interesting. On the one hand, continued cuts could keep the momentum going, helping more people and businesses to borrow and spend. It’s like making sure there’s enough wind in your sails to keep cruising smoothly.

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But on the flip side, if rates get too low for too long, it could lead to problems like inflation. Plus, super-low rates can encourage risky borrowing, which isn’t great for the long-term health of the economy. So, it’s a bit of a balancing act but one that’s slowly getting under control.

Where the market benefits

If these rates keep coming down beyond the 4.75% mark, there are certain sectors that will benefit. First, there’s housing. Lower interest rates mean cheaper mortgages, which can get more people buying homes and spark a bit of a building boom.

Then, there’s the consumer staples sector. Think of companies that provide the everyday essentials we can’t live without: groceries, toiletries, and household items. When borrowing is cheaper, people might feel more confident about spending on these necessities and even a few luxuries. It’s like filling your cart with all your favourites at the grocery store without feeling guilty!

Then, we have the utilities sector. This includes those companies that keep the lights on and the water flowing. These businesses often rely on borrowing for infrastructure projects and expansions. Lower rates mean they can invest more in improving services and expanding, which benefits everyone. So, is there a company that should benefit from all this?

BEP stock

Let’s shine a spotlight on Brookfield Renewable Partners (TSX:BEP.UN) and why it’s poised to benefit from these interest rate cuts, especially when it comes to its juicy dividend. First off, Brookfield Renewable is all about clean energy. They operate wind, solar, and hydroelectric power plants around the globe.

Now, building and maintaining these green energy projects isn’t cheap — they need to borrow a lot of money to keep things running and growing. Lower interest rates make this borrowing cheaper, which means they can take on more projects or improve existing ones without breaking the bank. It’s like getting a discount on building an eco-friendly mansion instead of a regular house.

BEP stock is also known for paying a solid dividend, which is a major draw for investors. When interest rates are low, the income from fixed-income investments like bonds isn’t as attractive. As of now, BEP has a dividend yield of around 5.79%. That’s pretty sweet compared to what you’d get from your average savings account or even a lot of other stocks out there.

Now, let’s look at their revenue and earnings. For the latest quarter, BEP reported revenue of around US$1.2 billion. That’s a nice chunk of change, showing they’re generating solid income from all those wind turbines, solar panels, and hydro plants. Their net income, or profit, was around US$76 million. It’s like having a lemonade stand that’s not just breaking even but making serious profits.

The payout ratio, which tells us how much of their earnings a company is paying out as dividends, is around 70%. This means they’re keeping 30% to reinvest in the business while still being generous to shareholders. It’s like having a balanced budget where you save some for a rainy day but still enjoy life.

Bottom line

With lower interest rates, BEP is in a fantastic position to benefit. They can expand their renewable energy empire, keep their borrowing costs low, and continue to reward their investors with strong and potentially growing dividends. It’s a win-win that makes this stock a shining star in the green energy space!

The post 1 Dividend Stock to Buy if the Bank of Canada Keeps Cutting Rates  appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has positions in Brookfield Renewable Partners. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

2024