Should Investors Buy BCE Stock for its 8.7% Dividend?

BCE (TSX:BCE) stock has been known as a top dividend stock in the past, but there are a few issues to consider before buying.

| More on:
stock data

Image source: Getty Images

BCE (TSX:BCE) seems to be falling more and more in the last few months, with many investors seeking out returns simply afraid of the stock. Yet those who are interested in a dividend may be wondering whether now is the time to jump in, especially with an 8.7% dividend yield on the line.

So, is it worth the risk for the high dividend? Let’s take a look at just how safe that dividend is and what the next few years might look like for BCE stock.

What happened?

Before we get into the future, let’s take a look at the past. Shares of BCE stock have taken a beaten for a few reasons. During February, BCE stock reported a decline in profits and announced a 9% workforce reduction. This led many investors to be concerned over the future growth prospects of the company.

Furthermore, there continues to also be pressure on the company form the Canadian Radio-Television and Telecommunications Commission (CRTC). The regulatory pressure comes as the company has been told to share its infrastructure with competitors to create more competition in the market. To which BCE stock said it would be cutting back its infrastructure building.

And its competitors have certainly been busy, with mergers and acquisitions in the telecom sector creating more pressure for BCE stock. Then there are the basic issues such as rising interest rates and a broader market selloff. All in all, BCE stock has gone through a lot in the last year, with shares now down 25% in that time.

The next few years

There are, of course, potential positives and negatives that could happen for BCE stock over the next few years. Some of the positives would likely include improved earnings if BCE stock can be successful in its restructuring and cost efficiencies after the workforce reduction. If profitability can improve, this could attract investors back in. Add in a lower interest rate and that still strong dividend, and it could look like a huge deal among stocks.

  • We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Enbridge made the list!

But there are negatives to consider. The CRTC could continue to tighten its regulations, putting pressure on BCE stock with little way of expanding without sharing its infrastructure. And that would likely create a limit on the ability to raise prices and expand services, and increase its competition in the process.

What it really comes down to for this article, however, is the dividend. So, how safe is it exactly?

Is the dividend safe?

What we really want to know is if you’re buying this stock for its dividend, is there likely to be a cut? There are a few metrics Canadian investors can consider, so let’s look at some of them for BCE stock.

First, there’s the payout ratio, which is the percentage of a company’s earnings paid out as dividends. With a 170% payout ratio, that means it’s dipping into reserves to keep up its dividend, making it dicey.

Then there’s free cash flow, to see how BCE stock will generate cash after accounting for its operating expenses and capital expenditures. As of its most recent full-year earnings report, free cash flow was at $2.593 billion, just a 0.27% increase from 2022 levels. That could also be an issue, given that it’s not making much more than it was before.

Then there’s debt, with the stock’s debt-to-equity ratio at 176%. Again, that’s not good, as it means it would take 176% of its equity to pay off all debts. So, while BCE stock may have increased its dividend by 3.1% recently, I’d be far more worried about a cut in the future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

hand using ATM
Dividend Stocks

Should Bank of Nova Scotia or Enbridge Stock Be on Your Buy List Today?

These TSX dividend stocks trade way below their 2022 highs. Is one now undervalued?

Read more »

A meter measures energy use.
Dividend Stocks

Here’s Why Canadian Utilities Is a No-Brainer Dividend Stock

Canadian Utilities stock is down 23% in the last year. Even if it wasn’t down, it is a dividend stock…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

Got $5,000? Buy and Hold These 3 Value Stocks for Years

These essential and valuable value stocks are the perfect addition to any portfolio, especially if you have $5,000 you want…

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »

grow money, wealth build
Dividend Stocks

1 Growth Stock Down 24% to Buy Right Now

With this impressive growth stock trading more than 20% off its high, it's the perfect stock to buy right now…

Read more »

Dividend Stocks

What Should Investors Watch in Aecon Stock’s Earnings Report?

Aecon (TSX:ARE) stock has earnings coming out this week, and after disappointing fourth-quarter results, this is what investors should watch.

Read more »

Freight Train
Dividend Stocks

CNR Stock: Can the Top Stock Keep it Up?

CNR (TSX:CNR) stock has had a pretty crazy last few years, but after a strong fourth quarter, can the top…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Stocks Ready for Dividend Hikes in 2024

These top TSX dividend stocks should boost their distributions this year.

Read more »