Income investors are often left between choosing between current income and the possibility of future income, depending on which companies they choose. A slow growing company will have a large current yield, while one that’s growing faster will usually have a smaller current yield.
For young investors, the choice is usually pretty simple. They don’t have any pressing need for current income, so they’re free to choose stocks with a better growth profile. If all you’re doing is reinvesting dividends, then current yield doesn’t matter so much.
But when you’re older and looking for current income, income growth becomes less important. Getting paid now is the more pressing need, especially for retirees who get the majority of their income from dividends. Sure, older investors still want some dividend growth, but generally are pretty happy if their dividends manage to outpace inflation.
There are many stocks that nicely combine the need for current income and future growth. Canada’s banks are obvious choices, but they’ve performed so well that current yields are in the 3.5% range, which is low on a historical level. Energy companies are another popular choice, but they tend to lack the consistency that the banks enjoy.
What’s left? A lot of companies actually, but let’s focus on one that’s a great marriage between taking care of investors who’d like current income and those who want that income to grow, BCE Inc (TSX: BCE)(NYSE: BCE).
First of all, let’s take a look at the dividend. The company’s shares currently yield 5.05%, a terrific yield for this market. The company’s dividend growth has been spectacular as well. Since the depths of the Great Recession, BCE has hiked its dividend nine times, increasing the payout by more than 50%. While growth going forward probably won’t be as impressive, the company has clearly made dividends a priority.
Ultimately, dividends are a product of earnings. Everything comes from the company’s ability to earn, which it does primarily through its impressive moat. Between BCE and its two main competitors, they own more than 90% of Canada’s wireless market, a huge chunk of our media assets, and a large percentage of our wireline telephone and home internet service. Sure, customers will flip between the three competitors, but Canadians just cannot escape their reach.
That’s the kind of company I want to invest in. Even if a foreign player shows up and sets up shop as Canada’s much awaited fourth wireless carrier, this company will have to spend billions to even get a foothold in the market.
Sure, customers are cutting their home phones and television services, but BCE has such great pricing power that it continues to slowly grow each of these businesses. Besides, growth in the company’s media division is more than making up for any declines from its traditional businesses. It’s a classic move, controlling not only the medium that delivers the media but the media itself. All the advertising synergies help as well. Why do you think we see so many cell phone commercials on television?
BCE recently announced its plan to take the 56% of Bell Aliant Inc. (TSX: BA) that it doesn’t already own private. The acquisition is scheduled to close in the middle of the month, and looks to be a slam dunk. According to analyst projections, the deal will boost BCE’s free cash flow by $200 million per year, and add $100 million in synergies. Excluding any growth in the Bell Aliant assets, that amounts to an additional 40 cents per share that should ultimately get passed onto shareholders via increased dividends.
BCE is a terrific company with a strong moat, great current yield, and the potential for dividend increases in the future. If you’re looking for dividend income, it’s a terrific stock to own.
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 Nelson Smith has no position in any stocks mentioned.