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It used to be that receiving a dividend yield that represented anything near the long-term historical average annual return from investing in stocks was a rare find. If you did find a yield that high, you could be reasonably sure the dividend was at serious risk, and more often than not, you weren’t going to receive that payout for long.
However, there are quite a few examples of yields floating around in the market today in the 6-9% range and, barring some unusual development, are likely to stick around. Some of them might even grow a bit, as I suspect the current 7% yield at this featured stock will.
Foolishly yours,
Nate Parmelee
Senior analyst, Stock Advisor Canada
“Best Buys Now” Pick #1:
Telus (TSX: T)
To be fair, the recent headlines about the communications industry aren’t great. That’s certainly weighing on Telus’s (TSX: T) share price. I also think there is a pretty good argument that, at this point, the sales opportunities for current technologies are close to saturated. But there will be new, faster wireless technology to sell in the future, and Telus generally ranks highly — or at least better than its competitors — on service with competitive pricing. So, this isn’t a business in decline.
Bears will say that Telus’s dividend is unsustainable because it’s so far beyond the company’s net income. This argument doesn’t hold any water for me, though. Dividends are paid with cash flow, and last year’s free cash flow amply covered the dividend. More importantly, capital spending at Telus is in decline now that its fibre network is built, which means higher free cash flow.
In fact, I suspect Telus will raise its dividend this year. So, that 7% dividend yield that’s on offer now is likely to deliver a higher effective yield on today’s purchase price later this year. That is, of course, assuming the shares are bought while the share price is depressed.
