Canadian dividend investors are a bit stressed out right now. The plunge in oil prices continues to inflict pain on income seekers who own energy companies, and many investors are wondering where they can get some reliable yield without risking a 50% haircut to their initial capital.
Let’s take a look at both BCE Inc. (TSX:BCE)(NYSE:BCE) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see if one is a better pick right now for dividend investors who want to to reduce the volatility in their portfolios.
BCE Inc.
Canada’s largest telecommunications company looks a lot different now than it did a decade ago. Big investments in media and sports assets have transformed the stodgy old telephone firm into a vibrant communications giant.
The appetite for growth continues at BCE as the firm widens its competitive moat through strategic acquisitions and investment in best-in-class technology.
BCE recently announced it is buying Glentel Inc., a smartphone retailer with stores located in Canada, the U.S., and Australia. The $594 million deal, now being split with Rogers Communications Inc., helps fortify BCE’s retail operations across the country.
Late last year, BCE also decided to take its Bell Aliant subsidiary private in a $4 billion deal. The purchase means BCE’s shareholders now have Bell Aliant’s substantial free cash flow all to themselves.
In 2013, BCE spent $3.4 billion to buy Astral Media. The acquisition gave BCE access to lucrative pay TV channels in Quebec as well as a host of media and advertising assets.
All of this is good news for investors as the increased cash flow should translate into more dividend hikes in 2015 and beyond. BCE currently pays a dividend of $2.48 that yields about 4.6%.
Toronto-Dominion Bank
Toronto-Dominion is relying on a continued recovery in the U.S. economy to help drive revenue growth in the coming years. The company has invested heavily in building its retail network south of the border, and now plans to focus on organic growth in its 1,300 U.S. branches.
The stock has been a huge winner for investors during the last few years but Toronto-Dominion recently reported weaker-than-expected earnings results.
Competition for loans put pressure on margins in the U.S. operations last quarter and that trend is expected to continue this year. Gains from acquisitions in the U.S. are also expected to dissipate in 2015.
In Canada, growth has been robust but margin pressure is expected to hit returns in the coming quarters as low interest rates and increased competition for business impact earnings.
If market conditions turn out to be worse than expected, Toronto-Dominion will probably cut costs to protect earnings. If the company meets its current 2015 expectations, investors could still see another increase to the dividend, but it will likely be less than the payout hikes seen in recent years. The bank pays a dividend of $1.88 that yields about 3.4%.
Which should you buy?
Both Toronto-Dominion and BCE are great long-term holdings for dividend investors.
Despite TD’s warnings of tougher times ahead, the company could get some earnings relief from a strong U.S. dollar. Low gasoline prices could also benefit the bank as customers use the savings on gas to make other purchases. The result could be an increase in demand for car loans and higher credit card use.
BCE is in a sweet spot right now. As money rotates out of energy, mining, and even financials, it will probably find a home in BCE. The company has a better yield than TD and BCE’s dividend will probably increase this year. If you have to pick one, I’d go with BCE at this point in time.
Good dividend stocks are tough to find these days, but the Motley Fool team has been working hard to uncover a few more names that investors can rely on in 2015. The following free report analyzes three more stocks that might be worth adding to your watch list.
