Is TELUS Stock a Buy for Its 7% Dividend Yield?

TELUS stock looks pretty enticing with a 7% dividend yield. But what else should investors consider?

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TELUS (TSX:T) stock has long been a dividend winner, currently offering a dividend yield of around 7%. This certainly presents an attractive option for dividend investors. This high yield, however, comes with a few considerations that you’ll want to weigh carefully. So today, let’s dive into whether that dividend yield is worth it, or worth a wait.

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Some background

TELUS stock has a strong history of dividend growth, with the company’s dividend increasing consistently over the years. As of October 2024, TELUS’s forward annual dividend rate is $1.56 per share. The company has maintained a solid payout streak despite challenging market conditions. In terms of earnings, TELUS delivered solid performance in Q2 2024, with 14% year-over-year growth in quarterly earnings, plus a 5.6% increase in earnings before interest, taxes, depreciation and amortization (EBITDA)​.

Despite these improvements, the company is projecting to hit the lower end of its 2024 revenue targets due to competition in the telecom industry. Still, its focus on long-term EBITDA growth and efficiency measures provides some reassurance about the sustainability of its dividend.

However, despite the company’s growth initiatives, TELUS faces some financial challenges. The company’s high debt load of over $29 billion as of the most recent quarter puts pressure on its ability to invest heavily in future growth, all while maintaining such a high dividend. Furthermore, its payout ratio is very high, at nearly 284%. This suggests that a substantial portion of its earnings goes toward dividends, limiting room for future hikes unless earnings significantly improve.

Further considerations

The dividend yield of 7% is undeniably appealing for income investors, especially in the current low-interest environment. However, it’s important to consider the risks. The telecom sector is capital-intensive. With TELUS stock working to balance investments in 5G infrastructure, healthcare, and agriculture there’s some uncertainty about whether it can sustain both its capital expenditures and dividend at these levels, all while managing its large debt.

Yet TELUS stock’s recent collaboration with Google Cloud and Onix has added a new dimension to its growth strategy. This partnership is set to modernize TELUS’s data handling and artificial intelligence (AI) capabilities, enabling them to offer faster, more efficient services. This could be a key factor in driving future revenue and reducing costs, particularly in its health and agriculture segments, which have already shown growth potential​.

Plus, TELUS stock’s consistent dividend history and commitment to shareholder returns do make it an attractive stock for dividend investors. The partnership with Google Cloud and Onix could accelerate TELUS’s transition into more tech-driven sectors, thereby adding growth opportunities beyond traditional telecom services. For long-term investors, this could support future dividend stability and possibly even growth.

Bottom line

TELUS stock is a solid option for dividend seekers looking for high income. The company’s yield is impressive, but be mindful of the associated risks, particularly its high payout ratio and leverage. TELUS’s future looks promising with its innovative collaborations. Yet continued strong execution will be crucial to maintaining both its growth trajectory and dividend payouts.

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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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet and TELUS. The Motley Fool has a disclosure policy.

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