In the digital era, broadband stocks are utility stock. Canada’s telecom market is dominated by the trio of BCE (TSX:BCE), Telus (TSX:T), and Rogers Communications (TSX:RCI.B). These telecom titans have excelled in the geographical reach of the network. An Opensignal report measured the 5G network performance of 144 network operators worldwide and ranked BCE, Telus, and Rogers in 21st, 22nd, and 14th place.
Why should you invest in 5G?
The telecom industry is seeing a generational upgrade, which comes once in a decade. The 5G era is still at an early stage of adoption. It will digitize everything from drones to security cameras to self-driving cars. The 5G network will connect edge devices to the cloud, bringing artificial intelligence to the edge.
The 5G service could grow the average revenue per user, as the data connectivity will go beyond smartphones. More devices mean more subscriptions. The 5G opportunity makes telecom titans lucrative dividend stocks that can grow dividends.
Comparing the fundamentals of Canadian telecom titans
BCE and Telus are leading with the 5G network rollout, while Rogers is catching up. Rogers 5G rollout got delayed due to its two-year-long Shaw Communications acquisition. The acquisition is finally complete, and its 2023 earnings will incorporate the results of Shaw. Does this make Rogers a better buy? Let’s find out.
As a shareholder, a telecom stock can give you returns in the form of regular dividends and a marginal increase in stock price. Like all infrastructure stocks, telecom stocks also carry high leverage. They use the cash flow from operations to service debt, fund capital expenditure, and pay dividends. Higher debt could reduce a telco’s ability to grow its dividend. And that is what is happening with Rogers.
In the last 10 years, BCE and Telus have grown dividends at a compound annual growth rate (CAGR) of 5% and 6.7%, respectively, while Rogers increased dividends only twice in 10 years. Rogers’s (3.03%) dividend yield is also lower than BCE’s (6.04%) and Telus’s (5.29%).
The Shaw acquisition has increased Rogers’s leverage ratio to around 5.5 times — higher than BCE’s (3.3 times) and Telus’s (4.4 times) ratios. Rogers aims to invest $6.5 billion in the next five years to build a 5G network in Western Canada, leaving little room to grow dividends.
A higher debt in a high interest rate environment doesn’t work in favour of Rogers, as it competes with BCE and Telus. Moreover, two network outages in less than 18 months didn’t play well for Rogers either.
Which telecom stocks to buy?
If you are building a passive income portfolio, BCE and Telus stocks can generate higher dividends and even grow them faster than inflation. When faced with a choice, the best way to make an educated guess is to consider past dividends and see how much you would have earned.
If you’d invested $10,000 in each of the three telcos, your dividend income would look like this:
| Year | Dividend/Share RCI.B | Annual Dividends | Dividend/Share T | Annual Dividends | Dividend/Share BCE | Annual Dividends | |||
| 2023 | $2.00 | $422.00 | $1.4294 | $776.16 | $3.87 | $835.92 | |||
| 2014 | $1.83 | $386.13 | $0.7400 | $401.82 | $2.47 | $533.52 |
Here’s what a $10,000 investment in January 2014 would have bought you:
- 211 shares of Rogers that paid a $1.83 dividend/share, which translates to $386 in annual passive income. As the company’s dividend growth was tepid, your 2023 dividend income would likely be $422.
- 543 shares of Telus that paid a $0.74 dividend/share, which translates to $401.8 in annual passive income. The company’s strong dividend growth would have increased your 2023 passive income to around $776, assuming the company maintains its quarterly dividend/share throughout the year.
- 216 shares of BCE that paid a $2.47 dividend/share, which translates to $533.5 in annual passive income. Its stable dividend growth would increase your 2023 passive income to around $835, assuming the company maintains its quarterly dividend/share throughout the year.
The past 10 years of performance may not determine future returns. Stock markets are risky, and you can only make an educated guess.
Final takeaway
In order of preference, BCE is my first choice for passive income. Other than telecom stocks, diversify your portfolio across sectors like banks, real estate, and energy for passive income.
