Canadian savers are searching for reliable dividend stocks to own inside their self-directed RRSP or TFSA portfolios.
The yield segment in stocks took a bit of a hit in the past few years as rising interest rates began to push up the returns investors could get from no-risk alternatives, such as GICs. At one point last fall, a five-year GIC paid 3.5%, which would have been tempting for conservative income investors looking to generate safe yield.
Now, that same GIC offers about 2.5% thanks to a mood shift by the U.S. Federal Reserve and the Bank of Canada over the past six months. If pundits are correct, and the next moves by the central banks are to the downside, the return on fixed-income alternatives could continue to fall.
As a result, boring, old dividend stocks are back in vogue, and that trend could continue for some time.
Canadians seek out dividend stocks for two reasons. The first is for income generation. This tends to be the strategy employed by retirees who are searching for ways to get better yield from their savings. The other reason to own dividend stocks is to hold them for an extended time frame and use the distributions to buy new shares.
In the first case, the TFSA is likely the vehicle of choice, as the full value of the distributions can go right into your pocket, and the payouts don’t count toward your annual income calculation.
In the second situation, the RRSP might be the place to buy dividend stocks if you are looking to use the contribution to reduce your current taxable income. Otherwise, the TFSA would be a solid choice.
Which stocks should you buy?
Market leaders with strong track records of paying higher dividends supported by rising earnings tend to be solid picks. Ideally, these companies also have some form of competitive advantage that protects their stronghold position in the industry.
Let’s take a look at BCE (TSX:BCE)(NYSE:BCE) to see if it deserves to be on your buy list.
Wide moat
BCE is a giant in the cozy Canadian communications industry. The company has vast wireline and wireless networks that reach most people in the country. A few years ago, there was an attempt to get a foreign competitor to enter the market, but that didn’t work. Canada is a very big country with a relatively small population. The level of investment that would be required to build the needed network infrastructure simply wouldn’t be justified based on the available market opportunity.
To put this in perspective, the population of the greater Tokyo area is about the same as Canada’s at about 37 million.
On the domestic front, BCE is investing heavily in its fibre-to-the-premises initiative. It has the size and financial capacity to roll out the leading-edge technology and owning the big broadband pipe going into the house or business provides a built-in advantage.
BCE continues to grow revenue at a steady pace and free cash flow increases are adequate to maintain annual dividend hikes of about 5%. Investors who buy the stock today can pick up a yield of 5.3%. It will be a long time before GICs get close to that level.
Should you buy?
The stock isn’t cheap today, but you get a top-quality dividend with an above-average yield. The distribution should continue to grow, and there is little risk of the company disappearing. If you are searching for a low-maintenance dividend stock for your RRSP or TFSA, BCE deserves to be on your radar today.
