The stock market can be tricky but also simple. It depends on how you approach it. Some resilient growth and dividend stocks don’t look at aggressive growth but a stable and sustainable one. While there might be turbulence in the short term, returns are normalized in the long term. All you have to do is stay invested and expect a conservative passive income. It would be better to keep a range.
When the passive income falls below the lower end of the range, you know it is time to relook at the company’s fundamentals. If the reason for your investment in the company is lost, maybe it is time to exit.
A super dividend stock for your passive-income portfolio
Speaking of turbulence, investors have been selling stocks of companies with high leverage. The telecom sector is seeing a downturn amid regulatory changes. Canada has three telcos that have almost 90% market share. Telus (TSX:T) is the third-largest telco and is investing billions of dollars in fibre networks to provide broadband and 5G services to Canada’s vast geography.
Every eight to 10 years, telcos spend significant capital on a network upgrade that earns them increasing cash flows for a decade. Hence, telcos issue long-term notes and debentures to fund their network infrastructure. If you look at Telus’s balance sheet, it has $23.3 billion in long-term debt and only $864 million in cash reserve. Even its working capital is falling short by $3.1 billion because of the $4 billion long-term debt maturing in 2024.
But financing works differently in telecom. Telcos repay debt maturities by issuing new notes. Since the interest rate is high, Telus has to offer higher interest on new notes, increasing its interest expense by 49% in 2023. High capital spending and interest expense reduced the free cash flow and increased its dividend payout ratio to 77%, slightly above its 60-75% target range. However, it expects the ratio to return to its target range on a prospective basis as and when the Bank of Canada cuts interest rates.
Once-in-a-decade opportunity to lock in a high dividend yield
Telus has been growing dividends since 2005, with some fluctuations in the growth rate. It could either pause the dividend growth for some time or slow the growth rate if the situation demands it. The stock price has dipped 32% to $22.36 since April 2022, when the interest rate hike began. The last time this stock fell so low was during the pandemic. However, the company has been growing dividends by 6-7% throughout this time, which increased its dividend yield to 6.7%.
If you were to make a passive-income range that you can expect from this stock, it would look something like the table below.
| Year | Telus dividend per share (6% CAGR) | Total dividend on 895 shares |
| 2024 | $1.5044 | $1,346.44 |
| 2025 | $1.5947 | $1,427.22 |
| 2026 | $1.6903 | $1,512.86 |
| 2027 | $1.7918 | $1,603.63 |
| 2028 | $1.8993 | $1,699.85 |
| 2029 | $2.0132 | $1,801.84 |
| 2030 | $2.1340 | $1,909.95 |
| 2031 | $2.2621 | $2,024.54 |
| 2032 | $2.3978 | $2,146.02 |
| 2033 | $2.5417 | $2,274.78 |
| 2034 | $2.6942 | $2,411.27 |
If you invest over $20,000 in Telus stock now, you can buy 895 shares for $22.36 a share. The company has already declared $0.3761 in quarterly dividend per share. We first take a conservative estimate for the lower end of the range. Assuming Telus pauses its dividend growth for some time, you can at least get $1,346 in annual dividends for a long time.
How to earn $2,400/year in passive income
As I said before, growth normalizes in the long term. So, even if Telus slows its dividend growth, it would probably make up for it with higher growth in an economic upturn. Assuming a dividend compounded annual growth rate of 6% for the next 10 years, your $1,346 dividend could grow to $2,411 by 2034.
You can earn annual passive income in the range of $1,350-$2,400 in the next 10 years by investing $20,000 in Telus today. If your passive income breaches this range, it is time to revisit the company’s fundamentals.
