If you are sitting on cash and are looking for some ways to generate a decent return on it, the one company that would make considerable sense for you to acquire is BCE Inc. (TSX:BCE)(NYSE:BCE). The reality is, very few companies are able to put out the kinds of dividends that BCE does. The company does so well with dividends, some analysts have even suggested that BCE might be the top dividend stock in Canada—period.
But what makes it such a lucrative company?
For those that don’t know, BCE is a telecommunications company. Its business is broken up into wireless, wireline, and media. The first two are your typical operations that you’d expect from a company like this. It gives clients cell phones, Internet, television, and land-lines. And all told, this business is doing very well for the company. In Q1 2015, the company reported a year-over-year revenue growth of 9.7% in the wireless segment. And the wireline business did $1.24 billion in revenue in Q1. Media, on the other hand, is a newer business that the company operates. Effectively, that division acts like any media company does and tries to generate money from advertisers. Its operating revenue for Q1 was $726 million.
However, it’s not just the fact that it has a diversified business that makes it so lucrative. What makes it lucrative is the reality that no new company is going to be able to effectively compete with it any time soon.
Warren Buffett calls this an economic moat
If I asked you to go launch a railroad, how much would it cost? Millions? Billions? No one is really going to be able to launch a new railroad, giving those companies a significant economic moat. The same can be said for the telecommunication business, which runs a “railroad of wires.” To create a new network would require investors to put billions of dollars into the business, which would take a very long time to generate a return on investment.
Warren Buffett calls this high barrier of entry an economic moat. In essence, the more expensive it is to compete with a company, the wider that moat is. And it is the width of that moat that contributes to BCE’s ability to pay lucrative dividends.
Consider this…
If BCE was battling dozens of small companies that were trying to steal market share, it would have to spend more money on advertising and product development. That increase in expenditure would decrease free cash flow. A drop in free cash flow would mean it couldn’t pay out as much money in dividends. And it definitely pays out a lot of money in dividends. Right now, it has a yield of 4.89%, which comes out to $0.65 every quarter.
BCE is certainly one of the top dividend stocks in Canada. But if you take the lesson that Buffett teaches about finding a wide economic moat, you’ll probably have luck finding plenty of different dividend-paying companies out there.
