Let’s take a look at the situation right now to see if you should add BCE Inc. to your portfolio.
The recent rate cut by the Bank of Canada means the period of low interest rates is set to continue for quite a while. In fact, many analysts now believe the government’s next move will be another cut. This is great news for the dividend stocks that are considered to be the safest alternatives to bonds.
BCE is one of the market’s favourites because it has predictable earnings and a large dividend payout. The stock should continue to benefit from yield-hungry investors who are afraid of putting their money in other sectors of the market.
One beef investors have with the Canadian market is the lack of variety. Energy and financial companies account for as much as 60% of the TSX Composite Index. These two sectors have historically been very popular with dividend investors, but carnage in the oil patch and weak bank earnings have driven cash out of these groups and into the few remaining safe spots.
BCE is one of the best safe-haven choices and that trend is likely to continue in the medium term given the headwinds facing the banks and the continued volatility in energy markets.
The world’s top investors always look for stocks with a wide moat around the business. In the case of BCE, it is the company’s state-of-the-art network. Competition chatter resurfaces every once in a while when the government decides it needs some sympathy from the electorate. The likelihood that a fourth national carrier will enter the Canadian market is quite low. For large international players, the market is simply not attractive enough to go through the expense and headaches it would take to build a competitive business in Canada.
This might not be good news for consumers, but it is great news for investors in shares of BCE.
The company continues to expand its dominance in the communications space through media, retail, and telecom acquisitions. In the past two years BCE bought wireless retailer Glentel, took its Bell Aliant subsidiary private, and acquired Astral Media.
BCE pays a dividend of $2.48 per share that currently yields about 4.2%. The company does not have the fastest dividend growth in the country, but is does raise the payout on a consistent basis. This trend should continue as cash flow from the recently acquired assets continues to fill the coffers.
Should you buy?
BCE is currently trading at almost 20 times earnings, which is at the high end of its historic range. This makes the stock vulnerable to a sharp pullback if interest rates reverse directions. With rates expected to stay at current levels, or fall further, the market should continue to reward BCE with a high multiple.
There is a lot of money chasing yield in a small number of stocks right now and that trend should remain in place until the market feels confident that energy and financial stocks are going to head higher. For the moment, BCE is probably a good choice for conservative dividend investors.
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Fool contributor Andrew Walker has no position in any stocks mentioned.