The TSX Composite Index surged 6.5% between mid-June and July as the Bank of Canada went on an interest rate cut spree. The bank has cut the rate twice in the last two months, bringing the interest rate from 5-4.5%. This news was welcomed by the stock market as investors and companies got a respite from the high cost of capital. Passive-income stocks that fell throughout the interest rate hike are now showing momentum and a rebound rally.
Buying this passive-income stock at the dip
Among the dividend stocks, the telecom stocks rebounded in July as they paused their recessionary and competitive pricing. The biggest hit telco BCE (TSX:BCE) saw its share prices rebound 7% to around $46 this month after a two-year-long downtrend.
Despite this rally, the stock is trading closer to its 10-year low as investors remain cautious and wait for the upcoming second-quarter earnings on August 1. This subdued rally comes as its 113% dividend payout ratio worried shareholders about a potential dividend cut. However, the company continued growing its dividend by 3% even after expecting a 3-11% decline in its free cash flow for 2024.
The interest rate cut will help BCE reduce its interest expense, the key reason behind its net income decline. A 1% decrease in interest rates would increase BCE’s net income by $26 million. Since most of its debt is in Canada, BCE will benefit from the rate cut. Moreover, the company is restructuring its business, which could bring additional cost savings and help it focus on fast-growing businesses like digital ads, cloud and security.
While 2024 earnings will see a pullback, BCE has already factored in the decline and has kept $5.8 billion in liquidity to meet short-term cash payments, including dividend payments. BCE’s dividends are relatively safe. And even if it cuts dividends as a last resort, it will strive to grow it as the conditions improve.
How to build a powerful passive-income portfolio with just $20,000
The golden rule of investing is to buy the dip. And this is a once-in-a-decade opportunity to buy a high-yield dividend stock at its 10-year low and lock in an 8.7% yield. A $20,000 investment in BCE stock today can buy 436 shares and earn you $870 in passive income for the remainder of 2024.
| Year | BCE Stock Price 3.2% CAGR* | BCE DRIP Shares | BCE Share count | BCE Dividend per share (3% CAGR) | Total dividend |
| 2024 | $45.85 | 436.0 | 436.0 | $3.99 | $869.82 |
| 2025 | $47.32 | 18.4 | 454.4 | $4.11 | $1,867.38 |
| 2026 | $48.83 | 38.2 | 492.6 | $4.23 | $2,085.27 |
| 2027 | $50.39 | 41.4 | 534.0 | $4.36 | $2,328.25 |
| 2028 | $52.01 | 44.8 | 578.8 | $4.49 | $2,599.14 |
| 2029 | $53.67 | 48.4 | 627.2 | $4.63 | $2,901.11 |
| 2030 | $55.39 | 52.4 | 679.6 | $4.76 | $3,237.69 |
| 2031 | $57.16 | 56.6 | 736.2 | $4.91 | $3,612.77 |
| 2032 | $58.99 | 61.2 | 797.5 | $5.05 | $4,030.71 |
| 2033 | $60.88 | 66.2 | 863.7 | $5.21 | $4,496.32 |
| 2034 | $62.83 | 71.6 | 935.2 | $5.36 | $5,014.98 |
| 2035 | $64.84 | 77.3 | 1012.6 | $5.52 | $5,592.63 |
| 2036 | $66.91 | 83.6 | 1096.2 | $5.69 | $6,235.90 |
BCE offers a dividend-reinvestment plan (DRIP) that reinvests the dividend to buy more shares that will also pay dividends. The DRIP gives you a return by increasing the share count, and BCE will accelerate its efforts by growing its dividend by 3% annually. You will benefit from this slow rally as your dividend can buy more DRIP shares.
Assuming BCE’s share price grows by 3% annually, your $870 dividend could buy you 18.4 DRIP shares. That is another advantage of DRIP. You can also own 0.4 shares. Adding the DRIP shares to your share count, you can compound your dividend to over $6,200 in 12 years, assuming the dividend continues to grow by 3% and the DRIP continues. Many companies like Enbridge have paused their DRIP plan.
Back-up plan
A strong portfolio is the one with a plan B. In the event the stock does not meet your passive-income expectations, you can also invest in resilient growth stocks like Descartes Systems that can build you an emergency fund to cover the deficit.
