Rogers Communications’s (TSX:RCI.B) merger with Shaw Communications in April should continue to shake up an otherwise mature telecommunications market. Its latest price-action move to slash its most popular 5G data plan rates in half this month could be an attempt to bolster market share. That said, dividend investors building a passive-income portfolio should look beyond that. BCE (TSX:BCE) stock could be the better TSX dividend stock to buy right now.
BCE and Rogers Communications are Canadian telecommunications and media giants with solid earnings. They tussle with each other in tightly contested wireless, internet data, and media markets, yet they potentially attract somewhat different classes of investors, with the former being a favorite for passive-income portfolios.
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Buy BCE stock for its outsized dividend yield
BCE reported a 3.5% year-over-year growth in first-quarter 2023 revenue, despite a softer advertising market so far this year. Adjusted earnings came in 4.8% lower partly due to higher interest costs. However, free cash flow was ample enough to cover the company’s raised dividend (by 5.1%) for 2023. Management reiterated its guidance for 1-5% revenue growth and a 2-10% year-over-year increase in free cash flow this year. The business is doing well, and BCE’s stock price is up nearly 10% year to date.
BCE stock is a Dividend Aristocrat that pays a quarterly dividend yielding 6% annually. BCE’s dividend yield is twice as high as that of Rogers Communications stock, which yields at 3%. By choosing to buy BCE stock over Rogers Communications stock, dividend investors will earn twice the annual dividend income on the same investment.
Off the bat, a $10,000 investment in BCE stock would generate $600 in annual dividend income, while the same investment in Rogers Communications stock would generate half the dividend payout at $300 during the first year of investment. BCE could amplify the yield faster, given its sustained dividend-growth history.
BCE stock has historically raised dividends at a higher rate of 5.1% over the past five years. Compared to Rogers’s 0.8% average annual dividend-growth rate over the past five years, BCE stock is a clear winner for a new dividend investment. Its higher dividend yield and faster dividend-growth rate (at least historically) win over passive-income investors’ hearts, and rightly so.
That said, BCE’s dividend coverage looks poor from an earnings angle. The company pays out more than 120% of its earnings in dividends. Usually, high earnings payout rates imply potentially unsustainable dividends. Rogers Communication has a much lower and more sustainable earnings payout rate of 56.2%.
However, adjusted for high depreciation and amortization expenses, BCE’s highly recurring cash flows are good enough to sustain the payout. Even so, Rogers has better room to raise dividends at a faster clip than its competitor — if it so wishes to win more dividend investors over.
Why buy Rogers Communications stock?
Subsequent to its Shaw merger, Rogers Communications expects to deliver a 20-30% revenue growth year over year in 2023 (up from 4-7% organic growth) and a 12-24% surge in free cash flow this year.
Bay Street analysts anticipate a robust 14.7% annual earnings-per-share growth rate over the next five years at Rogers Communications. The group of investment professionals assigns much lower five-year earnings-per-share growth rate of 4.6% per year on BCE. A higher earnings growth amplifies Rogers’s capacity to generate better total returns for its stock investors over the next five years.
Rogers Communications stock may have a lower initial dividend off the bat, but it has better dividend coverage, a lower risk of a dividend cut, and a higher capacity to raise dividends faster than BCE. Further, Rogers’s leadership may use growing earnings to reinvest into new growth projects or buy back shares.
Investors in Rogers Communications stock could thus harvest higher capital gains. What Rogers Communications stock lacks in dividend income, it makes up in capital gains potential.
Investor takeaway
BCE stock is a clear winner for dividend investors looking to generate high passive-income yields on current investments. However, investments are best assessed on their total-return prospects. Rogers Communications has room to grow dividends faster than BCE and may generate higher capital gains to compensate for the dividend yield shortfall.
