I pay my telecom provider every month for my cell phone usage. I chose the lowest-cost plan that suits my needs and it still costs $480 a year. Think about the other monthly payments you need to make and the seemingly small amounts add up quickly.
Why not buy a big telecom to pay that $480? Telus Corporation (TSX:T)(NYSE:TU) just raised its dividend from $0.40 per share per quarter to $0.42, a seemingly 5% increase. However, it makes more sense to compare the quarterly payout with the payout from the same quarter of the previous year.
In the second quarter of 2014 Telus paid out $0.38 per share. So, the annual dividend increase is actually 10.5%. When was the last time you received a 10% raise from your job?
Is Telus a buy at the 4% yield?
In the past few years, Telus seldom reached over the 4% yield. Just by looking at the yield, it is not a bad time to start buying its shares.
Telus’ dividend and history
Telus aims to pay out 65-75% of its earnings and its current ratio is at the lower end at 66%. Further, the telecom plans to increase dividends twice in 2016, and plans to add an annual increase of roughly 10%.
However, the company notes that the dividend hikes are not guaranteed. They are still based on Telus’ financial situation and the market outlook at the time. Still, with a record of growing dividends for 11 years in a row, Telus is probably unwilling to break that record.
How many shares do I need to pay my phone bill?
A bill of $480 a year implies $120 per quarter. Telus’ quarterly dividend is $0.42 per share. This means I need 286 shares to pay the bills. 286 shares costs $12,012 at $42 a share. For a growing yield, that will outpace my phone bill increase, and I think that’s pretty good.
If you want to lower that cost, you can instead do the following: blend for a higher yield.
Buy enough shares of BCE Inc. (TSX:BCE)(NYSE:BCE) to receive $60 per quarter. BCE pays a higher yield than Telus; its yield is 4.8% and pays out $0.65 per share per quarter. That means you would need 93 shares to receive the $60 per quarter. Buying 93 shares at $53.50 per share implies a cost of $4,976.
Then buy 143 Telus shares to receive the remaining $60. This requires $6,006.
Together, the BCE and Telus shares cost $10,982. This is $1,030 less than the cost just buying Telus shares for the same amount of income.
The difference between BCE and Telus dividends
BCE is the biggest telecom in Canada with a market capitalization of 45 billion, while Telus has a market cap of 25.5 billion. It’s true the BCE pays a higher yield, but it also grows slower as the bigger company.
For instance, BCE’s last annual dividend hike was 5.3%, while Telus’ was 10.5%.
Both companies are pretty solid. And it’s up to you as an investor to choose if you want a higher income now and slower income growth, or if you want slightly lower income now and higher growth. If you’re undecided, you can always go with a blend of the two by buying shares of both telecoms.
