Chasing high dividend yields without putting in the homework beforehand can lead to considerable downside in a hurry, especially when it comes to the firms (like the lesser-known mid-caps) that lack a long enough track record on the public markets.
Indeed, those smaller-cap tend to be a more volatile ride that may be too much for new investors to handle. With interest rates hovering close to highs (even with the latest rate cut from the Bank of Canada), investors don’t need to look too far for a battered bargain. Some of the large-cap blue chips have actually been under serious pressure in recent years, and it’s these names that may look the most appealing through the eyes of value investors.
Undoubtedly, former market darlings that have fallen out of favour are definitely worth checking in on. That said, buying a huge position at one price may be a riskier endeavour than you think. Sure, large-caps and ex-market darlings may be able to use their size to their advantage (think economies of scale) through the toughest of days.
However, don’t think that a blue chip is 100% safe just because of its large market cap. Indeed, investors should always put in more than enough due diligence before loading up on any name, including the much-owned ones that some may refer to as no-brainer buys whenever they dip substantially.
BCE stock: A former market darling with an 8.9% yield
Indeed, BCE (TSX:BCE) is a fallen telecom stock that has a huge dividend yield right now. As the share price tumbled, the yield has skyrocketed. And with shares back on the retreat in recent weeks, questions linger as to just how “safe” BCE’s dividend will be with every quarterly fumble and steep share price tumble. At writing, the stock goes for 23.1 times trailing price to earnings (P/E).
That’s not a cheap multiple, in my opinion, especially when you consider the headwinds and the waning growth profile. Additionally, technological shifts may stand to disrupt BCE’s cash flows at some point in the distant future. Indeed, Elon Musk’s Starlink, a firm that sells internet via satellite, stands out as a disruptor that could weigh heavily on the top telecom companies around the world.
Starlink could be a telecom disruptor
Starlink doesn’t just make it easy to get a connection from remote regions, but the firm may be the new normal for how we connect 10 years down the road. Indeed, Starlink services may not be in a spot such that we axe our telecom service providers just yet.
Notably, connecting to a satellite in space comes with a higher degree of latency. Also, the connection may not be nearly as stable depending on how it’s accessed. Either way, you can bet Starlink is aiming to solve such shortcomings. And with a more portable antenna recently released, I think that the future is highly uncertain for firms like BCE and the broader telecom scene.
I have no idea if Starlink and its like will apply pressure on wireless telecom providers. Further, BCE and the pack can adapt as the technology gradually works its way into the mainstream. Notably, the Canadian telecoms have partnered with various satellite companies, so it’s not as though they’re asleep at the wheel.
That said, there’s a chance that global players like Starlink could take share away from telecom incumbents. Of course, I could be wrong, but Canadian telecoms could catch up in the race to space connectivity. Regardless, I’d have to pass on BCE, even though the 8.9% yield looks so tempting as the stock continues to plunge.
