A Dividend Giant I’d Buy Over BCE Stock Right Now

While BCE has long been a go-to for dividend seekers, it may be time to explore elsewhere for lower, but safer income.

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When it comes to dividend stocks, few names resonate as strongly as BCE (TSX:BCE). Known for its longstanding tradition of generous payouts, BCE stock has built a reputation as a reliable income-generating investment. However, in the current higher interest rate environment, the challenges facing debt-heavy telecom companies like BCE have become more pronounced. Slower growth and higher costs have investors questioning whether this traditional dividend giant is a safe investment.

The struggles of BCE: A cautionary tale

BCE has been a staple in many dividend-focused portfolios, but recent trends tell a different story. Over the past decade, revenue per share growth has stagnated, posting a compound annual growth rate (CAGR) of only 0.3%. This lack of growth translates to a concerning decline in diluted earnings per share at a CAGR of -1.1%. Surprisingly, the company has managed to increase its dividend per share by 5.2% annually during this period. This seemingly paradoxical situation raises important questions about the dividend sustainability.

While BCE’s ability to generate substantial operating cash flow has fueled its dividends, the stock has struggled since interest rates began to climb in 2022. Currently, BCE shares are down about 25% from their 2022 high, even after a recent 10% bounce.

Its hefty dividend yield now hovering around 8.6% may be tempting to some investors. However, the flat growth in operating cash flow – up only 4.4% over the past decade – casts doubt on the future of dividend hikes. The latest increase of 3.1% falls short of historical norms, suggesting that BCE may be running out of steam.

A strong alternative: Brookfield Renewable Partners

Enter Brookfield Renewable Partners L.P. (TSX:BEP.UN), a renewable energy giant that has navigated the challenges of rising interest rates with remarkable agility. Unlike BCE, BEP has performed exceptionally well over the past 12 months, delivering a stunning total return of 40%. Any investor would eagerly welcome this kind of performance.

BCE Total Return Level Chart

BCE and BEP.UN Total Return Level data by YCharts

Brookfield Renewable’s business model focuses on long-term, contracted power generation, which translates into reliable and predictable cash flows. Its long-term debt is primarily fixed-rate, allowing the company to forecast interest expenses with precision. While facing similar pressures from higher interest rates, Brookfield has not only adapted but thrived, showcasing resilience and growth potential.

Investors can appreciate BEP’s impressive cash distribution growth, which mirrors BCE’s at a 10-year CAGR of 5.7%. However, several factors suggest that Brookfield may offer even more robust growth going forward.

Approximately 70% of its revenues are inflation-linked, providing a natural hedge against rising costs. Furthermore, Brookfield operates as both a developer and an operator, allowing it to reap higher returns from its development pipeline while enhancing margins through improved efficiencies. Its capital recycling strategy is designed to seek out higher risk-adjusted returns. As a global leader in the space, it is the partner of choice for corporate clients. Notably, the company forecasts to double its power generation to corporate customers by 2029.

Brookfield Renewable Partners L.P. starts with an appealing 5% cash distribution yield. For those looking for dividend options, the corporation version of the stock trades at a premium to the limited partnership, offering a yield of about 4.3%. This provides investors with a choice depending on their tax considerations and income preferences.

The Foolish investor takeaway

While BCE has long been a go-to for dividend seekers, its recent struggles and uncertain growth trajectory raise valid concerns. In contrast, Brookfield Renewable Partners not only offers a competitive cash distribution yield but also presents stronger growth potential and overall safer income in the long run. For investors looking to make a smart choice in today’s market, BEP may be the dividend giant worth considering over BCE.

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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 Kay Ng has positions in Brookfield Renewable Partners. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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