Is a Dividend Cut Coming for This 8.92%-Yielding Stock?

BCE stock (TSX:BCE) recently increased its dividend by 3%, but investors may be in for a cut if the company hopes to balance the books.

| More on:
Golden crown on a red velvet background

Image source: Getty Images

For decades now, dividend stock BCE (TSX:BCE) has been known as one of the Dividend Aristocrats to own. Year after year, no matter the market, BCE stock has managed to increase its dividend. This included most recently by 3%, even as the company announced poor earnings.

This has some investors concerned. Not just that the company may continue to perform poorly, but that a dividend cut could be in the near future. So let’s look at what that would mean for investors.

What would warrant a dividend cut?

To understand why a dividend cut might be coming for BCE stock investors, let’s look at why a company would want to do so in the first place. There are several reasons, ranging from financial performance and investment needs, to market conditions and debt reduction.

For instance, if BCE is experiencing financial difficulties or a decline in profitability, it might cut its dividend to conserve cash and strengthen its balance sheet. This could be due to factors like declining revenues, increased competition, or higher operating costs. Furthermore, if the company needs to invest heavily in growth initiatives such as expanding infrastructure, launching new products or services, or acquiring other businesses, it might cut its dividend to redirect cash flow towards these investments.

Market conditions haven’t helped,  as changes in the economic environment, regulatory challenges, or shifts in consumer behaviour might necessitate a dividend cut to ensure the company remains financially stable and competitive. All while BCE stock continues to increase its debt loads at high interest rates. Therefore, it might prioritize debt reduction over dividend payments to improve its creditworthiness and reduce interest expenses.

The case of BCE stock

All of these issues have currently combined to create a dire situation for BCE stock. The company continues to see a decline in revenue, with its debts increasing at higher interest rates quarter after quarter. All while it hoped to invest heavily in the growth of its wireless infrastructure.

The problem is, BCE stock cut back this investment as competition increased. The Canadian Radio and Television Commission (CRTC) demanded that BCE stock share its infrastructure with competitors. This has created a situation in which BCE stock, therefore, does not want to build that infrastructure. Meaning less for everyone all around.

And it’s no secret the market hasn’t been performing well. So all considered, BCE stock is in a fairly horrid situation. It needs cash now, and yet the company continued to increase its dividend to hold that Dividend Aristocrat status.

Bottom line

Currently, BCE stock trades with a dividend payout ratio at 170%. It also would need 175% of its equity to cover all its debts, which means it does not have enough. So even though the company recently increased its dividend, don’t be fooled. BCE stock may decide to continue holding a high dividend yield to attract investors. But it really should be cutting it to balance its books. And that could be trouble for investors if they hope for both dividends and returns.

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

Business success with growing, rising charts and businessman in background
Dividend Stocks

5 TSX Stocks With High Dividend Growth to Buy Now

These TSX stocks sport a high dividend growth rate and are known for consistently rewarding their shareholders with increased cash.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Canadian Blue-Chip Stocks: The Best of the Best for May 2024

These two blue-chip stocks are up in 2023, sure, but have seen even more growth in the last few decades.…

Read more »

Couple relaxing on a beach in front of a sunset
Dividend Stocks

Passive Income: How to Make $33 Per Month Tax-Free by Doing Nothing

Hold monthly paying dividend stocks such as Exchange Income in your TFSA to begin a tax-free stream of passive income…

Read more »

data analyze research
Dividend Stocks

Is Telus Stock a Buy on a Dip?

Telus is down more than 20% over the past year and now offers a great dividend yield.

Read more »

A plant grows from coins.
Dividend Stocks

2 Top Dividend-Growth Stocks to Buy in May

These two dividend stocks saw major growth after earnings that promised more was coming in the future. And now could…

Read more »

Dots over the earth connecting the world
Dividend Stocks

Best Stocks to Buy in May 2024: TSX Telecommunication Services Sector

The telecommunication services sector is currently going through an upheaval. It is a good time to buy these stocks.

Read more »

Dividend Stocks

Bulletproof Income: How to Earn Safe Dividends With Just $10,000

These Canadian dividend stocks have the potential to sustain and increase their payouts for years under all market conditions.

Read more »

warning or alert
Dividend Stocks

Attention, Cautious Investors: This Top Dividend King Just Climbed 7% and Can Keep Going

Fortis (TSX:FTS) stock is still down 10% in the last year but up 7% on strong earnings that demonstrate more…

Read more »