Canada is home to some of the best dividend superstars with a strong history of steady and growing dividends. While business uncertainty and debt do bring some short-term headwinds, they rarely change anything for long-term investors. A dividend superstar is born from a robust, low-risk business model. This model is something that enjoys regular minimum cash flow in all types of business cycles. The company may have high debt, but it diversifies its cash flow across debt, equity, and reinvestment in business, ensuring a smooth cash flow cycle.
A dividend superstar to build a reliable passive income
Telus (TSX:T) is one such dividend superstar that has built a strong business model over the years. The company has set certain target range for debt and dividend payouts. It also has a buffer cash reserve to help it move the cash flow cycle at times of short-term headwinds.
Telus earns cash flow from wireless and wireline subscriptions. The company invests a significant amount in building fibre network infrastructure. Most of this capital expenditure is funded through debt and some through internal reserves. The company has been investing in 5G infrastructure, which has increased its net debt by $28 billion.
Telus short-term headwinds
Telus had set a target for its net debt to be between 2.2 and 2.7 times its EBITDA (earnings before interest, tax, depreciation, and amortization). However, the 5G rollout increased this ratio to 3.85 times in the June quarter. As the company realizes more income from the 5G offerings, this ratio will stabilize and return to the target range in a year or two.
Along with high debt, Telus entered into pricing competition with BCE, and aggressive promotional activity coupled with high interest expense from debt reduced its free cash flow. Hence, dividend-payout ratio of Telus (83%) also exceeded its target range of 65-70%. However, the ratio was lower than last year’s 87%.
These short-term headwinds have pulled Telus stock down 35% from its April 2022 peak and inflated its dividend yield to 6.9%, making it a buy for the long term.
How to earn $5,000 in annual passive income
A $10,000 investment in Telus can buy you 443 shares that can pay $172 in the fourth-quarter dividend. Telus offers a dividend-reinvestment plan (DRIP) that reinvests the dividend amount to buy more shares. At present, the company pays $1.53 in dividends per share. However, it keeps growing its dividend at an average annual rate of 7%. If we take a conservative estimate of a 6% dividend growth, its dividend per share could grow to $3.89 by 2040.
If you want $5,000 in annual passive income, you will need 1,310 shares (1,310 x $3.89 = $5,095). To buy 1,310 shares, you will have to shell out more than $29,500. But if you use DRIP, you can get these shares for just $10,000. Here’s how.
| Telus Stock Price | Year | Telus DRIP Shares | Telus Share count | Telus Dividend per share (6% CAGR) | Total Dividend Amount |
| $22.56 | 2024 | 443.0 | $1.5304 | $172.37 | |
| $30.00 | 2025 | 5.75 | 448.7 | $1.6222 | $727.97 |
| $30.00 | 2026 | 24.27 | 473.0 | $1.7196 | $813.37 |
| $30.00 | 2027 | 27.11 | 500.1 | $1.8227 | $911.59 |
| Continues for 10 years | |||||
| $35.00 | 2038 | 92.09 | 1079.5 | $3.4601 | $3,735.12 |
| $35.00 | 2039 | 106.72 | 1186.2 | $3.6677 | $4,350.64 |
| $35.00 | 2040 | 124.30 | 1310.5 | $3.8878 | $5,094.94 |
The DRIP will keep buying more shares of Telus without any brokerage. If you invest through a Registered Retirement Savings Plan (RRSP), you can also save on dividend tax. If you look at the above table, the dividend income grows to $911 in 2027, and that can buy 30 DRIP shares, assuming a stock price of $30. While the DRIP compounds your shares, you can invest the remaining $19,500 to build more such passive-income streams.
