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.
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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 Kay Ng owns shares of Telus.