Investing in a portfolio of fundamentally strong dividend stocks should help you generate a stable stream of passive income in addition to long-term capital gains. However, it’s crucial to understand that not every dividend-paying stock is a good investment. In fact, most companies that offer an above-average dividend yield to shareholders should be further analyzed to see if the payouts are sustainable across business cycles.
Dividends are not guaranteed and can be revoked anytime, especially if a company’s financial metrics deteriorate. So, you need to evaluate if the dividend-paying company generates a stable stream of cash flow, which is enough to sustain operations, service interest payments, and pay shareholders dividends.
Given these factors, let’s see if you should buy BCE (TSX:BCE) stock for its double-digit dividend yield.
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Is BCE a good dividend stock to own in 2024?
Valued at a market cap of $31 billion, BCE is a Canada-based telecom giant. It provides wireless voice and data communication products and services, internet access, and streaming services, among others.
Earlier this year, I identified Canada’s telecom giant BCE as a high-risk investment due to its unsustainable payout ratio. Back in March 2024, BCE offered shareholders a forward yield of 8.8%. However, the company’s payout ratio has risen from 105% in 2021 to 111% in 2023.
Moreover, a report from Veritas Investment emphasized BCE’s payout ratio could surpass 131% in 2024. Now, the payout ratio for BCE is much higher as it excludes capital leases while calculating free cash flows. According to Veritas, capital leases are required to purchase and maintain critical assets such as cell towers and satellites, and they should be included when calculating the free cash flow.
So, if we adjust for capital leases, BCE’s payout ratio is much higher at 155% in 2023, up from 115% in 2020. Alternatively, BCE claimed that its payout ratio would move below 100% next year once its fibre expansion is completed. However, Veritas maintains that the ratio will again surpass the 100% threshold due to capital lease expenses.
Today, BCE stock is down 55% below all-time highs, offering a tasty dividend yield of 11.7%.
What’s next for the TSX stock?
In the third quarter (Q3) of 2024, BCE saw a 1.8% year-over-year decline in sales. While product revenue fell by 14.3%, mobile phone contracted sales were down 25% compared to the year-ago period. The company’s wireless service revenue was also down 1% due to competitive pricing pressures.
BCE reported a non-cash media asset impairment charge of $2.1 billion as it continues to experience weakness in the traditional advertising market.
With a high net debt leverage ratio of 3.7 times, BCE’s weak performance in Q3 meant its operating cash flow fell by 6.1% year over year. It cautioned investors that higher severance and interest payments are impacting cash flow as earnings narrowed by 7.4% in the September quarter from the year-ago period.
BCE confirmed it would maintain a dividend of $3.99 per share in 2025. However, dividend growth will be paused until the payout and leverage ratios improve.
Analysts tracking BCE stock expect free cash flow to improve to $3.6 billion in 2026, up from $3.1 billion in 2023. Comparatively, its annual dividend expense is over $3.6 billion, making BCE a high-risk investment right now.
