TELUS Stock Has a Nice Yield, But This Dividend Stock Looks Safer

TELUS stock certainly has a shiny dividend, but the dividend stock simply doesn’t look as stable as this other high-yielding dividend stock.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published December 11, 2024 8:00 pm EST

| More on: OLYT

When comparing dividend stocks, TELUS (TSX:T) stands out with an attractive yield. However, Olympia Financial Group (TSX:OLY) takes the lead in dividend safety, thanks to its disciplined financial management and more sustainable payout ratios. So let’s look at what investors can take away from these two dividend stocks.

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Dividend safety

TELUS is a well-known name in Canadian telecommunications and boasts a forward dividend yield of 7.2%. This high yield is backed by a forward annual dividend rate of $1.61 per share. While this might catch the eye of income-seeking investors, TELUS’s payout ratio of 242.9% raises significant red flags. This figure suggests the dividend stock is paying out more in dividends than it earns. A strategy that could jeopardize its ability to sustain payouts unless earnings grow substantially. High payout ratios often signal potential trouble ahead, as the company may be forced to cut dividends if cash flow tightens.

On the other hand, Olympia Financial Group offers a slightly lower yield at 6.9%, with a forward annual dividend rate of $7.20 per share. However, its payout ratio is a conservative 55.1%. This means just over half of its earnings are returned to shareholders as dividends. That leaves room for reinvestment in the business and cushions the company against potential economic downturns. Such a balanced approach is often a hallmark of a stable dividend stock.

Into earnings

When looking at recent earnings, TELUS reported a net income attributable to common shares of $923 million over the trailing 12 months. While the dividend stock experienced impressive quarterly earnings growth of 105.9% year-over-year, its overall diluted earnings per share (EPS) of $0.63 doesn’t fully cover its dividend obligations. Plus, TELUS’s debt levels are concerning, with $29.1 billion in total debt and a debt-to-equity ratio of 171.6%.

Olympia Financial Group presents a stark contrast with its disciplined financials. For the nine months ending September 30, 2024, the dividend stock reported total net earnings of $17.9 million, a 3% increase from the previous year, and revenue of $76.9 million, a 3% year-over-year rise. These steady results are paired with a manageable total debt of $4.3 million, plus a low debt-to-equity ratio of just 11.3%. This strong balance sheet enables Olympia to maintain its dividends even in uncertain times, a key consideration for long-term investors.

Looking ahead

TELUS’s outlook for 2024 reflects a cautious optimism. The dividend stock maintained its guidance for TTech adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), plus consolidated targets for capital expenditures and free cash flow. However, its TTech operating revenue growth is expected to land slightly below the lower end of its original target range. This suggests that while TELUS may keep its financials on track, the road to robust revenue growth may remain bumpy.

In contrast, Olympia Financial Group’s outlook continues to be stable. Its diversified revenue streams, including trust services, private health plans, and currency exchange services, contribute to a resilient business model. This diversity reduces reliance on a single revenue source and enhances the company’s ability to maintain consistent earnings, even during economic downturns. This foundation underpins Olympia’s ability to provide sustainable dividends.

From a long-term perspective, TELUS’s appeal lies in its established position in a stable industry with growth potential in technology-driven services like healthcare and security. However, the current financial challenges cast doubt on the sustainability of its high dividend yield. Olympia Financial Group, with its smaller scale, focuses on delivering steady, reliable returns to its shareholders. Its prudent financial practices and consistent earnings make it a dependable choice for dividend investors seeking stability.

Bottom line

While TELUS offers an attractive yield for those prioritizing high income, its financial risks and elevated payout ratio may make some investors uneasy. Olympia Financial Group, despite a slightly lower yield, stands out as the safer dividend stock, with disciplined financials and a sustainable dividend model that appeals to those seeking reliable long-term income. For dividend investors who value safety alongside yield, Olympia emerges as the better pick.