8.86% Dividend Yield! I’m Buying This TSX Stock and Holding it for Decades

The TSX is seeing a pullback as the US Fed kept the interest rate unchanged at 5.25% and reduced the 2024 rate cut instances from three to one. Instead of a 1.25 percentage point cut, there will now be only a 25 basis point cut, keeping the US interest rate at 5%. The US Fed’s tighter monetary policy reversed the TSX surge from the Bank of Canada’s rate cut in early June. Several dividend stocks nosedived, inflating their yield. One such stock is BCE (TSX:BCE).

This TSX stock is offering an 8.86% dividend yield

BCE stock recovered slightly in June, rising 3.4% as the Bank of Canada cut its hkey benchmark lending interest rate. However, the Fed’s decision reversed the effect, and the stock fell 4.1%. This dip has given you an opportunity to lock in an 8.86% dividend yield.

Yield = Dividend per share as a percentage of stock price

The stock price of BCE has fallen by 25% in the last 12 months, and the dividend has risen by 3.1%. You are getting more dividends for a lower price. It is like the Black Friday sale for dividend seekers, as BCE has a history of paying dividends for over 40 years.

This historical trend shows that one of Canada’s oldest telecom service providers has perfected its business model in response to the crisis, technology upgrades, regulatory changes, and interest rates. However, historical data may not always predict the future accurately. Is this high yield a warning sign of a dividend pause or dividend cut?

The risks that come with the 8.86% dividend yield 

Let us look at the macro trends and BCE’s reaction to them. On average, bull markets have lasted for about 4.5 years each. The longest bull market in American history lasted 10 years (2010 to 2020), supported by record-low interest rates and record-high business profits, especially from the tech industry. This long bull run allowed some tech stocks to see the $1 trillion market cap for the first time.

BCE sustained its 5% compounded annual dividend growth rate during this long bull run. The telco reduced its dividends in the 2008 Financial Crisis and the 2000 Dot.com Bubble.

In 2008, BCE did not cut dividends but only paid dividends twice instead of four times. While analysts hope BCE will not cut dividend rates, I will not rule out the possibility of the company showing sensitivity to the macroeconomic situation.

BCE needs significant capital investment to build a telecom infrastructure that connects the vast land area of Canada. Most of this capital comes from debt, as the infrastructure tends to generate assured cash flow through subscriptions. The project has a pay-off period, and that’s how BCE repays old debt, creating space for new debt. Thus, tight financial markets put BCE in a tight spot. The high-interest expense on its debt reduced its free cash flow. As it retained its dividends per share, it paid out 113% of its FCF as dividends in 2023.

Why is BCE stock a buy-and-hold for decades?

For certain, 2024 is a transformative year for the telco as it is restructuring its business from telco to techno. It is selling its low-returns business and expanding into digital ad, cloud, and cyber security organically and through acquisitions.

If things don’t go as planned, BCE might pause or cut dividends for a year or two. However, once the financing eases and benefits of restructuring kick in, the telco will also grow its dividends at an accelerated rate to compensate for years of dividend cuts.

As for the tussle with the regulator over network sharing with other telcos, whatever the outcome, BCE will find alternative sources of income to mitigate the impact. The 5G opportunity is huge as everything will be connected to the cloud and the internet, making BCE a buy-and-hold.