Should You Buy BCE Inc. for the 5% Yield?

Dividend investors are looking at the pullback in the stock price of BCE Inc. (TSX:BCE)(NYSE:BCE) and wondering if this is the right time to buy.

Let’s take a look at Canada’s communications giant to see if it deserves to be in your dividend portfolio.

Rate pressure

BCE has come under pressure in recent weeks amid investor concern about future interest rate hikes.

Why are interest rates important?

Telecom companies and utilities offer attractive dividends, but the spread between GICs and the dividend yield starts to close when interest rates rise, and this can trigger a shift out of the higher-risk investments.

Rising rates can also put a pinch on earnings for these companies, which tend to carry significant debt.

With most market observers now saying interest rates have finally bottomed, a shift out of some dividend stocks is expected, but the exodus might be overblown.

Are investors getting ahead of themselves?

The Bank of Canada is expected to increase rates at very small increments and over an extended period of time. It doesn’t have much choice, given the fact that many Canadians are carrying too much debt.

If rates rise too quickly, the Bank of Canada risks triggering a sharp correction in the housing market, and that could lead to broader economic difficulties, including a rise in unemployment.

If the economy hits a rough patch, the rate hikes would likely stop or even be reversed.

Should you buy BCE?

BCE’s growth outlook isn’t spectacular, but the company is still growing and generates significant free cash flow to support the dividend and even maintain dividend increases.

In addition, BCE and its peers can always arbitrarily raise fees to boost margins. Consumers might not be happy, but it’s good for investors.

The recent acquisition of Manitoba Telecom Services helped boost 2017 earnings guidance, and BCE now has a solid base in central Canada to expand its presence in the western provinces.

At the current stock price, investors are getting a 5% yield, which isn’t going to be available from a GIC or savings account for years.

If interest rates rise faster than expected, the stock could come under more pressure, so I wouldn’t back up the truck, but it might be worthwhile to start nibbling.

There is a chance the market is overestimating how aggressively rates will actually increase, and the sell-off might prove to be a good opportunity for dividend seekers to buy the stock.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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