The 2023 Tax-Free Savings Account (TFSA) limit is $6,500, but you only need to invest $3,000 per year for the next 10 years to earn $2,150 in annual income for a long time. To earn $2,150/year you need to invest in a large-cap company with a well-capitalized dividend plan. One such stock is Telus Corporation (TSX:T).
Telus Corporation vs. Telus International
Do not confuse Telus Corporation with Telus International (TSX:TIXT). The first is the telecom parent, and the second is its IT service business.
Telus Corporation is Canada’s third largest telco offering a full range of solutions, including mobile, data, IP, voice, television, entertainment, video, and security. It is a capital-intensive business as it has to deploy a fibre network. But it enjoys regular and stable cash flows from its subscriber base, which it uses to pay incremental dividends to shareholders.
Telus International is an IT service provider that helps companies in healthcare, fintech, games, media, and e-commerce enhance their digital customer experience. This business is not capital-intensive and depends on acquisitions to grow. Most IT companies don’t give returns through dividends but through capital appreciation.
Given the different nature of these businesses, Telus spun off the IT business under Telus International. However, the telco holds 74.8% voting rights in the IT firm. If you seek dividends, invest in the telco Telus Corporation.
Why invest in Telus Corporation?
Last year, Telus Corporation accelerated its capital expenditure program for its PureFibre infrastructure and 5G network roll-out. The fifth-generation technology will set the stage for autonomous cars and smart cities by offering broadband-like speed on mobile data. The faster speed will lead to the proliferation of edge devices and drive subscription volumes.
Telus maintains a dividend payout ratio of 60 to 75% of free cash flow. But this ratio was exceeded in the last two years as it channelled its cash flow towards capital expenditure. Thus, Telus’s dividend payout ratio was 142% in 2021 and 95% in 2022.
With a net debt of $24 billion, the company cannot sustain such high payout ratios. But after excluding the $823 million capex in 2022, its payout ratio was 61%. So, the company can sustain dividends in 2023 and beyond as the accelerated capex program ended in 2022. It is now time to reap the rewards.
Telus intends to increase its annual dividend by 7–10% in the coming three years (2023 to 2025). The growth is in sync with its 10-year dividend CAGR (compounded annual growth rate) of 8.3%. The management can alter dividends anytime, depending on cash flows and growth plans. But Telus’s dividend growth during accelerated capex, the pandemic, and the 2008 financial crisis hint that the company might continue growing dividends.
Invest $3,000 and earn $2,150 in passive income
| Year | Telus Share price (6% CAGR) | Contribution | No. of shares purchased | Total shares | Dividend per share (8% CAGR) | Dividend income |
| 2023 | $29.5 | $3,000.0 | 101.7 | $1.4 | $137.90 | |
| 2024 | $31.3 | $3,000.0 | 95.9 | 197.6 | $1.5 | $289.43 |
| 2025 | $33.1 | $3,000.0 | 90.5 | 288.1 | $1.6 | $455.74 |
| 2026 | $35.1 | $3,000.0 | 85.4 | 373.5 | $1.7 | $638.05 |
| 2027 | $37.2 | $3,000.0 | 80.6 | 454.1 | $1.8 | $837.69 |
| 2028 | $39.5 | $3,000.0 | 76.0 | 530.1 | $2.0 | $1,056.12 |
| 2029 | $41.8 | $3,000.0 | 71.7 | 601.8 | $2.2 | $1,294.87 |
| 2030 | $44.4 | $3,000.0 | 67.6 | 669.4 | $2.3 | $1,555.64 |
| 2031 | $47.0 | $3,000.0 | 63.8 | 733.2 | $2.5 | $1,840.23 |
| 2032 | $49.8 | $3,000.0 | 60.2 | 793.4 | $2.7 | $2,150.61 |
From the $6,500 TFSA limit, keep $3,000 for passive income, $3,000 for growth, and $500 for riskier high-growth stocks. Invest the $3,000 for passive income in 12 installments of $250, each for the next 10 years to take advantage of volatile markets.
Assuming the Telus stock price grows at a 6% CAGR, a $3,000 annual investment will buy you 101.7 shares of Telus. If the company continues its 8% dividend CAGR, 101.4 Telus shares will give you $137.9 in dividend income next year.
A $3,000 annual investment will add to your share count, and you will own 793.4 shares by 2032. Telus’s dividend could grow to $2.70 per share, giving you an annual passive income of $2,150. If the share price is closer to $50, the dividend side of your TFSA portfolio could have a market value of $39,500, over and above the $2,150 annual passive income.
