3 Stocks for Lower Interest Rates in 2024

After over a year of aggressive interest rate hikes, central banks in both the U.S. and Canada appear to be taking their foot off the pedal. The more dovish tone of the Fed and the BoC in recent announcements indicates a possible shift in the monetary policy path.

Increasingly, the markets are expecting interest rate cuts may be around the corner. Some experts are forecasting multiple cuts in 2024. In anticipation, bond yields have already started to trend lower. As we approach the end of 2023, the forecast for bond yields continues to fall.

This scenario presents an opportunity for cautious investors to consider dividend-yielding stocks as a viable alternative to bonds. These stocks offer a dual advantage - a steady income stream as well as the opportunity to benefit from long-term equity market participation. While certain sectors may offer higher yields, opportunistic investors often focus on selecting winning bets from diverse industries. The following names across different sectors stand out for their consistent dividend payouts, robust cash flow, and potential for price growth.

BCE, a major Canadian telecom giant, offers a range of services, including wireless, broadband, television, and landline phone services across the country. As one of the three leading national wireless carriers, BCE commands a significant share of the market, serving approximately 10 million customers, or approximately 30% of the market.

The firm pays an excellent dividend, which it has consistently raised annually since 2008 when the financial crisis forced it to enact a cut. “The increase has been right at 5% each year since 2015, and we expect that to be the norm through 2027,” says a Morningstar equity report, that forecasts share repurchases to be minimal for the foreseeable future.

The overall dividend payout, typically ranging between 75% and 100% of free cash flow since 2014, exceeds the firm's target range of 65%-75%. It is expected to reach around 100% in 2023. However, maintaining such annual increases is stretching the balance sheet more than is necessary.

“BCE would be better served by getting away from automatically increasing the dividend every year, which might be eventually forced upon it, and instead use excess cash to repurchase shares when the opportunity presents itself or reduce its debt leverage,” says Morningstar equity analyst Matthew Dolgin, who puts the stock’s fair value at $65.

While wireline and wireless, business could face some competitive headwinds, BCE could “better monetize internet subscribers as the firm’s fiber network buildout matures,” he adds.

Established over a century ago, Clorox has a diversified portfolio of products spanning categories such as cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care items. U.S. accounts for nearly 85% of the company’s total sales.

For investors seeking income, Clorox fits the bill, boasting over 3% annualized dividend yield. Clorox issues quarterly dividends, with the next one scheduled for February 2024. The company has increased its dividend for 47 straight years, which demonstrates robust financial stability and its ability to pay consistent future dividends.

“We forecast that dividends will grow at a mid-single-digit clip each year through fiscal 2033, maintaining a payout ratio of around 60% in the longer term, while repurchasing a low-single-digit percentage of shares outstanding annually,” says a Morningstar equity report.

Clorox aims to meet 75%-85% of its future demand with a strategic planning cycle, a prudent approach that allows the company to reinvest in operations and enhance shareholder returns.

Morningstar equity analyst Erin Lash calls this “a wise approach that should ensure that the company maintains the resources to reinvest in its operations while juicing shareholder returns through dividends and share buybacks.”

However, Lash recently lowered the stock’s fair value to US$156 from US$168 to reflect the negative impact caused by Clorox's cybersecurity breach in August.

U.S. electric utility company Evergy serves eastern Kansas and western Missouri. It has a combined rate base of approximately US$19 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. The company is also one of the largest wind energy suppliers in the U.S.

Since 2018, Evergy has raised its dividend an average 6% annually, including a 7% increase for 2023. “Management's payout ratio target is 60%-70% of operating earnings, in line with most other regulated utilities,” says a Morningstar equity report, and forecasts 6% dividend increases for at least the next four years, aligned with earnings.

The company benefits from an advantageous competitive position due to its efficient scale, built on a combination of federally regulated transmission assets, and state-regulated generation and distribution assets. Its electric transmission in particular is a wide-moat business due to its efficient scale competitive advantage and favorable regulatory framework.

While the company has had to contend with less favourable rate regulation Missouri, a fresh round of rate negotiations is due in 2024.

“Like all regulated utilities, Evergy must obtain regulators' approval to charge higher rates,” says Morningstar equity analyst Travis Miller. “An adverse decision from regulators would negatively affect earnings, cash flow, and dividend growth.”

However, Kansas (about half of Evergy's total asset base) has a more constructive regulatory environment where “rate settlement in late 2023 was mostly constructive,” says Miller, who pegs the stock’s fair value at US$65.