7.6 Percent Dividend Yield! This Income Machine Keeps Paying

The recent interest rate cut by the Bank of Canada to 2.5% has made  Guaranteed Investment Certificates (GICs) and term deposits less appealing. When the interest rate falls, investors tend to look at the stock market for dividend stocks that offer a higher yield and stable income. One stock that stands out in the passive-income space is Telus (TSX:T), as it keeps paying quarterly dividends every single quarter.

How Telus manages to keep paying income  

Unlike GICs, Telus actually benefits from falling interest rates. The telco has a significant debt on its balance sheet, which it used to build the fibre infrastructure and buy spectrum to earn subscription money for years. When the interest rate falls, Telus’s cost of capital reduces while the subscription money keeps coming.

It pays dividends from the amount left after servicing debt, paying other operating expenses, and setting aside money for capital expenditures. Even in that remaining balance, it uses 60-75% of that amount for dividends. This gives it the flexibility to keep paying income even in years when free cash flow (FCF) is low.  

Is this 7.6% dividend yield better than GICs?  

Investors need not worry about any cuts in their income if interest rates fall. In fact, Telus will grow its income in line with inflation and sometimes even higher than inflation. That means more purchasing power for you.

It has a history of growing dividends for 21 years at an average annual rate of 12.5%. That is way more than the inflation rate. Telus manages to do so by cross-selling products and increasing average revenue per user (ARPU) on its existing telecom infrastructure.

This doesn’t mean there is no risk. Investing in a company’s stock makes you a part owner of both profits and losses. Your invested amount could fluctuate with the share price. However, you can reduce this risk by buying the stock at the dip.

Now is a good time, as the stock has slipped 4.9% in September. You can lock in a 7.6% yield, which offers a risk premium against GIC’s 3.5% annual interest.

This income machine matches income needs

Telus’s management targets to grow its dividend by 3-8% in the coming three years, making it more appealing than GIC despite the risk.  The company’s dividend growth rate has slowed from its 21-year average as high leverage on its balance sheet from capital spending on 5G infrastructure has reduced its FCF.  

Telus will focus on deleveraging its balance sheet by selling non-core assets. It recently sold its Terrion business for $1.26 billion, which will reduce its leverage ratio by approximately 0.17 times. It will also strengthen its other digital offerings that can benefit from the 5G network and increase ARPU. All these efforts will improve FCF in the medium term and enable Telus to accelerate the dividend-growth rate in the years to come.

Who should invest in this 7.6% dividend stock?

Considering that the principal amount will keep fluctuating with the share price, only individuals who want to earn passive income for a long time should invest in Telus. Individuals looking to withdraw the invested amount in a year or two should avoid investing in Telus, as the invested amount could increase or decrease by as much as 15-20%.  

A $10,000 investment today can buy you 454 Telus shares at $22. Its $1.6372 dividend per share in 2025 could grow to $2.0895 by 2030 at an average rate of 5%. The 454 shares could earn $948 in annual dividends by 2030 and a consolidated dividend of $4,312 in five years.