Dividend investing is an excellent strategy to create a passive-income stream in your self-directed investment portfolio. Buying and holding shares of dividend stocks in a Tax-Free Savings Account (TFSA) can help you enjoy those returns without incurring taxes. However, a successful passive-income portfolio requires identifying and investing in high-quality dividend stocks that offer reliable payouts.
BCE (TSX:BCE) is a popular Canadian dividend stock that offers $3.99 per share in annual dividends, translating to an attractive 8.68% dividend yield. Typically, dividend yields higher than 5% are alarming.
For a long-term strategy, you must invest in dividend stocks with underlying businesses strong enough to support payouts. While the attractive dividend yield for BCE stock might worry some investors, it is better to learn why it offers higher-than-usual yielding dividends before being wary of investing.
BCE
BCE stock does not offer such high-yielding dividends because the underlying company suddenly decided to go overboard with its dividend hikes. Rather, a decline in its share prices has inflated its dividend yield. As of this writing, BCE stock trades for $45.95 per share, reflecting a 30% downturn from its 52-week high.
The downturn came in lieu of macroeconomic jitters impacting the broader equity market. Rising key interest rates weighed on the financials of companies across the board. However, the drop in its share prices does not necessarily mean BCE stock is not performing well.
In the fourth quarter (Q4) of fiscal 2023, BCE stock saw a growth in sales and net additions. BCE also saw a growth in its market share over the broadband internet market due to the expansion in its fibre optics network. The company also improved its promotional offers to clients, delivering a marked improvement in its profitability during the December 2023-ending quarter.
Besides its wireless and wireline internet segment, BCE’s media segment saw a 19% growth in digital revenue. Accounting for 35% of its total sales, the media segment revenue grew from 29% in Q4 2022. Moving forward, the company is aiming to increase its investments in the digital space to grow revenue from this segment further.
Are the dividends sustainable?
The more pressing question for TFSA investors seeking tax-free dividend income is sustainability. At current levels, the payout ratio is 169.74%. Typically, healthy telecom companies maintain an 80% payout ratio because it gives them the ability to invest in growth projects, reduce debt loads, and make acquisitions.
BCE claims that its payout ratio will improve to more sustainable levels once it completes the capital expenditures related to its fibre expansion. Between the completion of that capital expense and an anticipated decrease in key interest rates, BCE stock might be able to make good on its claim of bringing the payout ratio to lower than 100% by 2025.
Foolish takeaway
Using a TFSA to build a successful passive-income stream requires time and patience. By reinvesting the dividends through a dividend reinvestment plan, you can accelerate your wealth growth through the power of compounding. Additionally, you can keep adding more shares of dividend stocks to your TFSA portfolio as the contribution room grows annually.
Eventually, you can grow your dividend income from the TFSA portfolio to the point where you can withdraw dividends as a tax-free income stream. To this end, BCE stock can be an excellent holding to begin building the foundations of a tax-free dividend income portfolio.
