Investing in stocks that pay dividends is a popular strategy for Canadians who are looking to generate a steady stream of income from their investments. BCE (TSX:BCE), one of Canada’s leading telecommunications companies, has long been a favourite among investors who prioritize dividends. However, with some recent fluctuations in its stock price and the resulting changes in its dividend yield, it’s worth considering whether it remains a good investment choice.
The appeal
As of writing, BCE’s dividend yield is sitting at approximately 12%. This is a figure that has certainly caught the attention of many investors. This high yield is partly a result of a significant drop in the dividend stock’s price over the past year. While a 12% yield might seem very attractive at first glance, it’s really important to take a closer look at the factors that have contributed to this particular situation.
In its latest earnings report for the fourth quarter of 2024, BCE reported adjusted earnings per share of $0.79. This is a slight increase from the $0.76 reported in the same quarter of the previous year. However, when we look at the dividend stock’s revenue for the entire year, it actually declined by 1.1%, thus coming in at $24.4 billion. This dip in revenue raises some questions about BCE’s prospects for future growth and its ability to continue supporting such a high dividend yield over the long term.
One of the key indicators that investors often look at when assessing the sustainability of a dividend is the payout ratio. This ratio essentially tells you what proportion of a dividend stock’s earnings is being paid out to shareholders in the form of dividends. In BCE’s case, the payout ratio is alarmingly high. When a company’s payout ratio is over 100%, it suggests that the company is actually paying out more in dividends than it is earning in profit. This kind of situation is generally not sustainable over the long term and has led to speculation among analysts and investors about a potential dividend cut in the future.
Looking ahead
The telecommunications industry in Canada is also highly competitive, with BCE facing significant challenges from other major players in the market. In addition to this, regulatory pressures and the ongoing need for substantial investments in infrastructure to keep up with technological advancements add to the company’s financial obligations. These factors could potentially impact BCE’s overall profitability and as a consequence, its ability to maintain its current levels of dividend payouts.
On the other hand, it’s worth acknowledging that BCE has a long-standing history of paying dividends to its shareholders. This might offer some reassurance to current and potential investors. The dividend stock’s management has also publicly expressed its commitment to returning value to shareholders. However, it’s crucial to remember that past performance is not always a reliable indicator of future results, especially when the company’s current financial metrics are raising some concerns.
For investors who are considering investing in BCE primarily for its high dividend yield, it’s absolutely essential to carefully weigh the attractiveness of that yield against the potential risks that are apparent. A 12% yield might seem very enticing. Yet if it turns out that this level of payout is not sustainable, investors could face the disappointment of dividend cuts or even further declines in the value of the stock itself. A prudent approach to managing risk in such situations is to diversify your investments. Also, avoid putting all your reliance on a single high-yield stock. Spreading investments across different companies and sectors can help to mitigate the impact of any potential negative events affecting a single investment.
Bottom line
So while BCE’s current dividend yield is notably high and might seem appealing to income-seeking investors, it is accompanied by significant concerns regarding its sustainability. These concerns stem from the dividend stock’s recent decline in revenue and its alarmingly high dividend payout ratio. Therefore, investors should exercise caution, conduct thorough and independent research, and carefully consider their own individual risk tolerance – all before making any investment decisions regarding BCE. Consulting with a qualified financial advisor can also provide personalized insights and guidance that are specifically tailored to your individual investment goals and overall financial situation.
