Why I Won’t Touch This 7.1% Yielding Dividend Stock With a 10-Foot Pole

TELUS stock (TSX:T) may have an ultra-high dividend yield, but there are certainly many concerns to consider before buying.

| More on:

Telus (TSX:T), a prominent player in the Canadian telecommunications industry, has long been viewed as a reliable dividend stock. However, current fundamentals and market conditions raise significant concerns about its stability and future performance. That’s why, today, we’re going to go through a few reasons why even with a 7.1% dividend yield, investors may want to reconsider their position in Telus stock.

First, the dividend

Telus stock offers an attractive dividend yield of 7.1%. However, a dividend cannot be paid if the company is paying out more in dividends than its earnings. This is where the payout ratio comes in.

Right now, the company’s dividend payout ratio is alarmingly high at 284%. This indicates the company is paying out more in dividends than it earns. This practice is unsustainable in the long term and raises red flags about the its financial health and ability to maintain such a high dividend payout. Especially without resorting to borrowing or dipping into reserves​.

Debt concerns

Another concern for investors is the company’s debt. Telus stock cannot continue to support a high dividend after all if it can’t even borrow money, which it has been doing at a high rate.

Telus stock has been aggressively expanding its operations and investing in new technologies, such as 5G networks and home security services. While these investments are crucial for future growth, they have significantly increased the company’s debt levels. Currently, the company trades at a 1.7 debt-to-equity (D/E) ratio. This would indicate that it would need 171% of its equity to cover its debts.

High debt can strain financial resources, especially in an environment of rising interest rates. This makes it more challenging for Telus to service its debt while maintaining dividend payments and funding capital expenditures.

Valuation

Then we have the overall valuation concerns over Telus stock. Telus’s current valuation appears stretched when compared to its peers. Despite its high dividend yield, the company’s price-to-earnings (P/E) ratio is trailing at 42.1. Furthermore, there are other valuation metrics suggesting that it may be overvalued relative to its growth prospects and financial health. This overvaluation can limit the stock’s upside potential and increase the risk of price corrections in the future.

Finally, this valuation may only become more strained. That’s because Telus stock has been seeing its earnings performance dwindle lately. After hitting revenue of over $5 billion, this shrunk back down in the first quarter. Meanwhile, net income dropped to half of what it earned in the fourth quarter of 2023 compared to the first quarter of 2024. If a company wants to keep paying a dividend, it needs to earn. And that doesn’t look too promising at this point.

Bottom line

While Telus has historically been a reliable dividend payer with a strong presence in the Canadian telecommunications market, several factors raise concerns about its future stability and performance. The unsustainable dividend payout ratio, high debt levels, and valuation concerns all suggest that investors should approach Telus stock with caution. Diversifying into more stable and financially sound alternatives within the sector may be a prudent strategy for mitigating risks and ensuring steady returns.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

More on Dividend Stocks

money goes up and down in balance
Dividend Stocks

Telus: Buy, Sell, or Hold in 2025?

With Telus trading just off its 52-week low and offering a dividend yield of more than 8%, is it a…

Read more »

shoppers in an indoor mall
Dividend Stocks

Here’s How Many Shares of CT REIT You Should Own to Get $151 in Monthly Dividends

Accumulating dividend stocks over time can help you build a sizeable passive income. Here’s how CT REIT can generate monthly…

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

BCE and Telus: How Canadian Telecom Giants Provide Stability in Volatile Markets 

BCE and Telus share prices nosedived in the second half of March. Are the Canadian telecom giants a buy at…

Read more »

dividends grow over time
Dividend Stocks

3 Undervalued Canadian Dividend Stocks Paying a Remarkable 6%+

These three dividend stocks are trading at attractive valuations and offer an over 6% dividend yield, making them excellent buys.

Read more »

hand stacks coins
Dividend Stocks

Invest $7,000 in This Dividend Stock for $2,010 in Yearly Passive Income

Here is a good opportunity to pump up your passive income portfolio with a one-time investment of $7,000 in this…

Read more »

woman looks at iPhone
Dividend Stocks

Prediction: These Could Be the Best-Performing Value Stocks Through 2030

The recent decline in these top value stocks makes them even more attractive to buy for the long term.

Read more »

Tech Stocks

2 Essential “Magnificent 7” Stocks for Canadian Portfolios

Two Magnificent 7 stocks with sustainable competitive moats are standout choices for Canadian investors.

Read more »

Canada day banner background design of flag
Dividend Stocks

The Canadian Stocks That Outperformed the Market in 2024

If you want Canadian stocks that already show strength, then these two belong on your watch list.

Read more »