1 Massive Reason I’d Avoid BCE Stock

BCE (TSX:BCE) stock’s dividend is a thing of beauty, but risks to the narrative remain in place.

| More on:
Bad apple with good apples

Image source: Getty Images

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 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.

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 Joey Frenette 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 Investing

A miner down a mine shaft
Metals and Mining Stocks

1 Canadian Mining Stock to Buy and Hold Forever

Cameco (TSX:CCO) stock is looking way too cheap to ignore after the latest correction off highs.

Read more »

Dollar symbol and Canadian flag on keyboard
Tech Stocks

2 Canadian Stocks to Watch While They’re Still Dirt Cheap

These two Canadian stocks offer ample opportunities as the world shifts into not just AI but cybersecurity needs.

Read more »

Pile of Canadian dollar bills in various denominations
Investing

2 Stocks to Buy Right Now With $5,000

Buy Bank of Nova Scotia (TSX:BNS) and another top financial stock with an extra $5,000.

Read more »

A person looks at data on a screen
Investing

The Best Stocks to Invest $500 in Right Now

Canadian investors can own this entire basket of five top stocks for less than $500 today.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, July 18

Despite yesterday’s negative reversal, the TSX Composite benchmark still trades with solid 4.5% month-to-date gains.

Read more »

A stock price graph showing growth over time
Tech Stocks

1 Hidden Catalyst That Could Ignite Dye & Durham Stock 

Dye & Durham stock surged more than 15% in the last two weeks. What is igniting the growth after a…

Read more »

Cogs turning against each other
Dividend Stocks

How Interest Rate Cuts Affect REITs

Now is a good time to investigate Canadian REITs and take a position in the form of stocks or exchange…

Read more »

a person searches for information on the internet
Tech Stocks

Before You Buy Nvidia: Here’s An AI Stock I’d Buy First 

Nvidia is the first stock that comes to your mind for AI. However, consider diversifying your AI stocks across the…

Read more »