Are you a risk-averse investor comfortable earning lower returns, as long as your invested amount is safe? Is your investment portfolio skewed towards fixed-income instruments like bonds and bank deposits? Then this article is for you. The interest you earn on bonds and deposits barely makes up for the inflation. While it does compound your returns in the long term, fixed-income securities alone cannot help you sustain your rising expenses. At such times, it is the stock market that gives you growth. And even here, you can earn fixed income from dividends that grow along with the market.
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Dividend investing through BCE stock
When you look at a dividend-growth stock, don’t look for capital appreciation, as most dividend stocks invest in infrastructure that generates stable income. And they grow their dividends by increasing fees or expanding infrastructure. However, not all companies with income-generating infrastructure give good returns.
Many energy dividend stocks saw a slowdown in their dividend growth, as the transition to natural gas and renewable energy accelerated. This shifted the focus to stocks that have scope to grow their dividend.
The digital revolution brought with it the necessity for communication. And this need will only grow as broadband moves beyond communication to performing tasks through artificial intelligence.
One communication stock efficiently tapping the digital revolution is BCE (TSX:BCE). It has managed to make its operations efficient by achieving scale. On one side, it has strong operating cash flows from wireless subscriptions. And on the other side, high capital expenditure leaves lower free cash flow for dividends.
However, the capex will ease as BCE nears the end of its accelerated capital spending on the 5G rollout. This could see its free cash flow improve over the coming years, as it did in the third quarter when it surged 17.4%. Moreover, the cash flow will grow as more connected devices come online. BCE stock has sustained its 6% dividend growth for over a decade and has the potential to sustain it for another decade as 5G matures.
Is now a good time to buy BCE stock?
The right time to invest in a Dividend Aristocrat like BCE is when the stock is trading at its low. As I said before, these stocks don’t give capital appreciation. If you buy dividend stocks at a higher price, your yield will be lower, and you will be disappointed to see your invested amount in red.
But BCE stock has dipped 14% in the last 12 months. While the stock has recovered slightly from its 52-week low, it is still trading at an attractive price of $54. For $54, you can lock in the annual dividend of $3.87, which equates to a 7.14% yield.
You get the dual benefit of locking in the same passive income for a cheaper price and lowering the decline in your invested amount.
Can BCE stock price recover?
The market has become bearish on stocks with high debts. Hence, BCE’s stock price has fallen. You can use this market bearishness to buy BCE stock in small quantities every month. It has a +40-year history of paying dividends without any cuts. Even now, its net debt is 3.5 times its adjusted earnings before interest, taxes, depreciation, and amortization, which is manageable.
These fundamentals hint that the stock has the potential to recover. And if Canada avoids a recession, BCE stock will continue to rise. Now is a once-in-a-decade opportunity to buy BCE stock and lock in a +7% yield. And if a recession strikes, BCE would be a more favourable stock to buy, as you can get it for a 20% discount without worrying about a dividend cut.
