Investing in dividend stocks with a reliable track record of paying shareholders their distributions is a great way to enjoy returns far superior to interest income from letting money sit idle in a high-interest savings account. BCE Inc. (TSX:BCE) has been an excellent investment for many stock market investors seeking reliable dividends over the years.
The $40.9 billion market capitalization telecom stock is a giant in the industry, but it has faced its fair share of challenges. Red-hot inflation and the resulting interest rate hikes severely impacted business.
As of this writing, BCE stock trades for $44.86 per share, down by 24.4% from 12 months ago. In that time, its dividend yield has gone from around 6% to a massive 8.9% at current levels.
With its payouts being significantly higher than its 5.6% 10-year average dividend yield, BCE stock might be a no-brainer for investors looking to boost their passive income with dividend stocks. The question is: Is the high-yield sustainable?
Problems for the telecom giant
When investing in dividend stocks, a good dividend yield is definitely an important factor to consider. However, high-yielding dividends are not the only factor you must consider when choosing a dividend stock for your self-directed portfolio. Typically, dividend yields higher than 5 to 6% are a warning sign.
Dividend yields higher than that for a stock usually reflect significant risks on the horizon for the underlying business. The payout yields become inflated when share prices go down. BCE stock and several top dividend stocks across the board have seen pullbacks in share prices over the last couple of years.
Businesses like BCE have significant capital expenses to ensure smooth operations and expansion. While BCE relies on its revenue to meet these needs, it also requires taking on debt to fund its projects. The Bank of Canada increased interest rates aggressively in the last two years to combat inflation.
BCE has been investing aggressively in improving its infrastructure to provide better service to existing customers and acquire more. The debt it used to finance these initiatives has become a problem due to higher borrowing costs.
The company’s revenues have not grown, which would make its increasing debt load more manageable, resulting in weakness in its typically strong balance sheet. The Rogers-Shaw merger means it also faces stiffer competition in the telecom market.
Foolish takeaway
The recent announcement to decrease key interest rates by the Bank of Canada spells much-needed good news for BCE stock and its investors. A falling interest rate environment will likely result in an improvement in the company’s financials. BCE has also sold off several assets from its media division and taken more measures to cut costs and improve its bottom line.
While it might take some time, these measures have the potential to improve the situation drastically in the coming quarters. Combined with further interest rate cuts, BCE’s share prices can start recovering. Investing right now might be a good way for long-term investors to lock in its juicy dividend yield.
Well-capitalized to deal with its shorter-term issues, BCE stock could be an attractive investment to buy at current levels and hold for the long run.
