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1 Top Dividend Stock to Buy in August 2022 and Hold Forever

·4 min read
A plant grows from coins.
A plant grows from coins.

Written by Joey Frenette at The Motley Fool Canada

The Bank of Canada has already shocked Canadians with a full 100-bps hike at its last meeting. In the United States, the Fed may wish to do the same, given how hot the job market is and the likelihood that the economy can absorb the gut punch of more super-sized rate hikes.

With tech stocks (and growth) pulling back over the uptick in rates, I’d argue that investors should stick with modestly valued discretionary plays that face the most upside come the next bull run.

Indeed, it’s hard to tell if the recent upside surprise in the American jobs number (over 500,000 jobs added in July) will induce another steep pullback in broader markets. The July market rally was remarkable, but August could prove choppier, as the bears and bulls duke it out.

The economy doesn’t seem to be in a recession quite yet. Central banks may be able to steer clear of one, as the job markets continue holding their own, as we move further into the battle against 9% inflation.

Maybe the economy isn’t as fragile as most thought going into the year.

Leon’s Furniture: A discretionary play riding on secular tailwinds

Currently, I’m a fan of the beaten-down cyclical stocks that have room to run if the economy can withstand further rate hikes. Consider shares of Leon’s Furniture (TSX:LNF), a Canadian furniture retailer that also scooped up rival The Brick a decade ago. The Canadian furniture scene may be crowded, with many smaller, American players like Williams Sonoma in the mix. That said, Canadians know and love the Leon’s and Brick brands, which are known to offer a great value.

Undoubtedly, the millennial cohort, who’ve delayed life milestones, such as buying a home, are becoming wealthier. Though higher rates are another hurdle in the way of millennials’ dream of homeownership, we are likely to see many get their first mortgages over the next decade. With that, many will need furnishings, and that’s where Leon’s could benefit greatly. It’s on the right side of a secular trend. And although recent headwinds have weighed down the stock, I think a recovery could be abrupt.

In short, the secular trend of millennials buying their first homes could more than shine through once recessionary woes are baked into the stock. At this juncture, I think most recession-related risk is baked in, with shares trading at 6.7 times price-to-earnings (P/E) multiple, which is below the industry average P/E of 8.6.

Undoubtedly, the retail industry average P/E is depressed, given its propensity to fold in the face of an economic recession. With a discount relative to industry averages and the means to navigate through the coming mild slowdown, I view LNF stock as one of the better bargains going into August.

A stretched dividend that should survive a mild recession

The 3.9% dividend yield is well above historical averages and slightly above the industry average (3.78%). Though the payout ratio is stretched at 75.5%, I think the payout is safe, assuming we’re dealt a milder-than-average recession or none at all!

Though Canada had some job losses in recent months, its unemployment rate remains at a very low 4.9% as of July. Indeed, this economy may be stronger and more resilient to rate hikes than we think.

The post 1 Top Dividend Stock to Buy in August 2022 and Hold Forever appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Leons Furniture?

Before you consider Leons Furniture, you'll want to hear this.

Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in August 2022 ... and Leons Furniture wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 27 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 8/8/22

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends LEONS FURNITURE.