The TSX Composite Index has surpassed its April 2022 peak and is now on the path to normal growth. While the market has picked up speed, dividend stocks are lagging in recovery as they wait for the U.S. Fed to cut interest rates. Once that happens, they will catch up with their tepid recovery and return to their normal trading levels. Before this happens, it is time to grab them at the dip and lock in a high dividend yield.
Grab this +8% dividend yield before it is gone
One such stock is BCE (TSX:BCE), whose stock price has fallen near its 10-year low. It is an opportunity to buy the stock at the dip and lock in a dividend yield as high as 8% before it is gone. The Bank of Canada started cutting interest rates, bringing respite to the telco’s debt-heavy balance sheet. So far, it has cut rates by 50 basis points, which will translate to $13 million in reduced interest expenses for BCE.
The reversal of the interest rate trend could also reverse BCE’s stock price momentum. Its stock price started descending in April 2022, when the rate hike began. From there, it dropped by almost 40%. When the Bank of Canada announced the first rate cut, the stock surged 3.7% but fell as the U.S. Fed kept the rate unchanged.
As most of BCE’s debt is in Canadian dollars, the rate cuts will bring a difference in interest expense even if the U.S. Fed keeps the rate unchanged. I don’t expect a recovery in the stock too fast, as the company’s ongoing restructuring and massive layoffs have gotten investors in cautious mode. However, improved income and cash flow from the restructuring could regain investors’ trust in its dividend-paying and growing ability.
Buying the dip will not only give you an 8.5% yield but also book your seat in the recovery rally.
How 8% yield can boost your investments
The Rule of 72 says an 8% yield can double your investment in nine years if reinvested. Let’s see how.
A $10,000 investment can earn you $800 in dividends. If you reinvest this amount, you will earn 8% on $10,800, increasing your second-year interest to $864. This compounding of interest will double your $10,000 to $20,000 in the ninth year.
| Years | Interest earned at 8% | Total Amount |
| 1 | $800.00 | $10,800.00 |
| 2 | $864.00 | $11,664.00 |
| 3 | $933.12 | $12,597.12 |
| 4 | $1,007.77 | $13,604.89 |
| 5 | $1,088.39 | $14,693.28 |
| 6 | $1,175.46 | $15,868.74 |
| 7 | $1,269.50 | $17,138.24 |
| 8 | $1,371.06 | $18,509.30 |
| 9 | $1,480.74 | $19,990.05 |
In an ideal scenario, compounding works this way. However, BCE can accelerate your investment return by increasing its share price and dividend per share annually.
How BCE can boost your investments
Assuming BCE’s share price grows at a compound annual growth rate (CAGR) of 3.2% and dividend at 3%, a $10,000 investment would grow your money as follows.
| Year | BCE Stock Price 3.2% CAGR* | BCE DRIP Shares | BCE Share count | BCE Dividend per share (3% CAGR) | Total dividend |
| 2024 | $47.00 | 213 | 213 | $3.99 | $424.47 |
| 2025 | $48.50 | 9 | 222 | $4.11 | $910.37 |
| 2026 | $50.06 | 18 | 240 | $4.23 | $1,014.67 |
| 2027 | $51.66 | 20 | 259 | $4.36 | $1,130.74 |
| 2028 | $53.31 | 21 | 281 | $4.49 | $1,259.92 |
| 2029 | $55.02 | 23 | 303 | $4.63 | $1,403.64 |
| 2030 | $56.78 | 25 | 328 | $4.76 | $1,563.53 |
| 2031 | $58.59 | 27 | 355 | $4.91 | $1,741.38 |
| 2032 | $60.47 | 29 | 384 | $5.05 | $1,939.18 |
A $10,000 investment can buy you 213 BCE shares at $47 per share price. BCE is giving a $3.99 dividend per share in four quarterly installments in 2024. Since the first half has passed, 213 shares can earn you $424.55 in dividends. For the full year, the dividend amount would be $849.
BCE offers a dividend-reinvestment plan (DRIP), wherein it buys you more shares from your dividend money. The DRIP could double your dividend money to $1,700 in eight years instead of nine, as the 3% dividend CAGR accelerated the effect of compounding. And your 384 BCE shares could be worth $23,220 at a $60.47 share price. In nine years, your $10,000 investment could be $25,159 ($23,220 portfolio value + $1,939 in dividends).
