Income Investors: Does it Still Make Sense to Invest in the Canadian Telecoms as Interest Rates Rise?

While market darlings like BCE Inc. (TSX:BCE)(NYSE:BCE) and Telus Corporation (TSX:T)(NYSE:TU) may seem like duds as rates rise, here’s why conservative income investors should consider staying the course in spite of longer-term headwinds.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Although there are many long-term headwinds that will negatively impact the Canadian telecoms, like rising interest rates and increased involvement of government regulators, the Big Four telecoms remain compelling investment options for income investors with a preservation-of-capital approach to investing.

It’s hard to match the safe, stable, and defensive nature of the telecoms. And for retirees, a rising interest rate environment is pretty much bad news for all the asset classes that offer the most stable sources of income. Think REITs, utilities, and telecoms, which are likely major holdings in the average retiree’s portfolio.

Sure, rates are going higher, but that doesn’t mean a retiree should ditch stocks based on the industry it’s in. It’s important to remember that individual companies certainly have the ability to offset industry-wide headwinds, and those that rise to the occasion can still offer long-term investors an above-average total return that has capital gains plus dividend payments.

Why is the Canadian telecom index slowing after years of top-notch performance?

If you look at many of the top Canadian telecom market darlings, like BCE Inc. (TSX:BCE)(NYSE:BCE) and Telus Corporation (TSX:T)(NYSE:TU), over the past few years, you’ll notice that the once-surging stocks are now beginning to stagnate.

The days of rock-bottom interest rates are over, and that’s bad news for companies that need to consistently spend a great deal on infrastructure. Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI) has been an outlier, with its shares surging over the past two years thanks in part to impressive subscriber growth momentum.

The wildcard, Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR), a long-time cable provider and new entrant to the wireless space through its subsidiary Freedom Mobile, has been trying to capture a chunk of the Big Three’s wireless pie, but over the next few years, it’ll be playing the game of catch-up as it improves its network to become more competitive in the space.

Bottom line

When you look at the telecom industry through a broader lens, it’s apparent that the longer-term headwind of rising interest rates is already baked in to the stock price at current levels, so it really wouldn’t make sense for retirees to lower their exposure to the telecoms, especially since, in the grander scheme of things, interest rates are still historically at the low end.

As a conservative income investor, you’ll still get a rock-solid dividend that will still grow by a respectable amount year after year, so I wouldn’t recommend going out of your way to replace your exposure to the telecoms just because rates are on the upward trajectory.

Telecoms are still an essential part of a prudent investor’s portfolio, and retirees shouldn’t be jumping in and out of telecoms because of fears over the next rate hike.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of SHAW COMMUNICATIONS INC., CL.B, NV.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »