Debt becomes cheaper to service when rates fall
As the Bank of Canada begins its rate-cutting cycle, a quiet rebalancing is underway — one that rewards patience over speculation. Three dividend-paying companies in utilities and infrastructure, long burdened by the cost of borrowed capital, now stand to reclaim profitability as that burden lightens. In a moment when falling rates signal both opportunity and economic caution, the stocks best positioned are those whose value does not depend on growth, but on the enduring necessity of the services they provide.
- Interest rates are falling in Canada, but the reason — a cooling economy — means investors must choose stocks that can benefit from cheaper debt without needing a boom to survive.
- Fortis, Brookfield Infrastructure, and Enbridge each carry billions in debt whose servicing costs are now poised to shrink, directly fattening their bottom lines as rates decline.
- Brookfield's annual interest expense nearly doubled between 2021 and 2023, and Enbridge's rose by over a billion dollars — making the rate reversal a material financial event, not just a sentiment shift.
- Dividend yields above 5–7% on these stocks grow relatively more attractive as bond yields compress, drawing income-seeking investors away from fixed-income alternatives.
- All three companies operate essential infrastructure — power grids, pipelines, ports, telecom towers — that generates steady cash flow whether the economy softens or stabilizes.
The second half of 2024 places Canadian investors in an unusual position: rates are falling, which is welcome, but they are falling because the economy is slowing. That tension defines the investment case for three companies that can prosper in either climate.
Fortis, the TSX-listed utility, exemplifies the opportunity. Utilities are among the most recession-resistant businesses imaginable — demand for electricity and water does not waver with GDP. Fortis also relies heavily on debt to fund operations, so as borrowing costs decline, its interest expenses shrink and profitability rises. Its 4% dividend yield, meanwhile, becomes more competitive as bond yields fall and investors seek income elsewhere.
Brookfield Infrastructure Partners and Enbridge follow the same logic across different terrain. Brookfield's global portfolio — telecom towers, ports, railroads, utilities — generates reliable cash flows across economic cycles. Enbridge moves energy across North America, embedded in the continent's daily functioning. Both carry heavy debt loads that swelled between 2021 and 2023 as rates rose; both stand to see those costs contract meaningfully as the cycle turns. Enbridge yields above 6.8%, Brookfield above 5.4%.
These are not wagers on a roaring recovery. They are structured bets on stability — on the mechanical relief that comes when the cost of borrowed money falls, and on the quiet resilience of businesses that people cannot do without.
The second half of 2024 presents a peculiar moment for Canadian investors: interest rates are falling, which should be good news for stocks, but they're falling because the economy itself is cooling down. That contradiction sits at the heart of the investment case for three dividend-paying companies that can thrive in either scenario.
For years, rising rates have been a headwind across most sectors. Now that the Bank of Canada has begun cutting, and the U.S. Federal Reserve is expected to follow, there's real potential for a sustained rally among stocks that were beaten down by the higher borrowing costs. But the catch is real too. Rates don't fall in a vacuum. They fall when inflation cools and economic growth slows. So the stocks worth buying now are those that can capture the upside of lower rates while staying steady if the economy stumbles further.
Fortis, a utility company trading on the TSX, fits that profile cleanly. Utilities are among the most recession-resistant businesses in existence—people need electricity and water regardless of whether the economy is booming or contracting. Fortis is also a heavy user of debt to fund its operations, which means it stands to gain substantially as borrowing costs decline. When rates fall, the company's interest expenses shrink, boosting profitability. At the same time, as yields on bonds and other fixed-income investments fall, investors rotate into dividend stocks, and Fortis's 4% yield becomes more attractive. The stock has room to run from its current levels.
Two infrastructure plays offer similar logic with different flavors. Brookfield Infrastructure Partners operates a global portfolio of essential assets—telecom towers, ports, railroads, utilities—that generate steady cash flow quarter after quarter. Enbridge, meanwhile, is woven into the fabric of the North American economy, moving energy across the continent. Both companies carry substantial debt loads. Brookfield's interest expense nearly doubled between 2021 and 2023, climbing from roughly $1.5 billion to more than $2.5 billion. Enbridge saw its interest costs jump from just under $2.7 billion to more than $3.8 billion over the same period. As rates decline, those expenses will contract, and profitability will improve materially.
Both stocks also pay meaningful dividends—Enbridge yields above 6.8%, Brookfield above 5.4%—and both provide essential services that hold up during economic downturns. Their diversified operations spread risk across geographies and asset classes, which matters if growth does slow. The math is straightforward: lower rates mean lower debt service costs, which flows directly to the bottom line. And as bond yields compress, the relative appeal of these dividend stocks rises.
The real question for investors is whether the soft landing policymakers are hoping for actually materializes, or whether the economy slides into something rougher. These three stocks are built to handle either outcome. They're not bets on a booming recovery. They're bets on stability and the mechanical benefit of declining interest expenses in a world where rates are finally moving down.
Notable Quotes
Lower interest rates will boost profitability as debt service costs decline, while also making dividend yields more attractive to investors rotating out of fixed income.— Investment analysis
The Hearth Conversation Another angle on the story
Why does it matter that these companies use so much debt if rates are falling?
Because debt becomes cheaper to service. When Enbridge pays $3.8 billion a year in interest, every percentage point the Bank of Canada cuts flows directly to their bottom line. That's not speculation—it's arithmetic.
But if the economy is slowing, won't that hurt their core business?
Not these three. Utilities and infrastructure are essential. People don't stop using electricity when growth slows. Enbridge still moves energy. Brookfield's ports and railroads still operate. That's the whole point—they're defensive.
So you're saying the dividend yield is just the bonus?
Exactly. The yield is what you collect while you wait for the rate cuts to work their way through the profit margins. And as bond yields fall, those dividend yields become more attractive relative to alternatives.
What's the risk here?
If the economy doesn't slow as much as expected and rates stay higher longer, you miss out on the rally. And if things get really bad, even utilities can face pressure. But the debt load becomes an asset when rates are falling, and a liability when they're rising. We're in the falling phase now.
How long does this play work?
As long as rates are declining. Once they stabilize, the mechanical benefit stops. But these are long-term holds anyway—the dividends alone make them worth owning for years.