Shares of Canadian telco giant BCE Inc (TSX:BCE) slumped 2.3% Tuesday, following a Globe and Mail report that indicated the company would not increase its dividend for three more years. The article, based on a BCE Investor Day presentation, outlined the fact that the company was focused on paying down debt and supporting emerging divisions, which continued dividend hikes would conflict with. News of the dividend increase moratorium came just months after BCE slashed its dividend in half, which may explain why the stock reacted so negatively to the news.
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Why it matters
BCE is a classic dividend stock. The underlying company rarely ever grows its earnings, but it does earn enough to pay out a nice sized dividend. In the past, investors were getting (or rather, expecting to get) a 12% yield from BCE stock. The previous dividend and stock price theoretically produced a yield around that level. However, the dividend was cut, and although the stock price fell in tandem with the dividend, the ultra high BCE yield investors had been used to, never returned. BCE stock yields about 5.2% today.
Takeaway for investors
The big takeaway for investors here is that one can never rush into buying a stock because it looks cheap or high-yielding. If a stock pays $0.50 per quarter, or $2 per year, and costs $20, does it have a 10% yield? It certainly has a 10% trailing yield, but if the dividend gets cut tomorrow, then the investor who buys today does not get a 10% yield today.
So, make sure to always study the fundamentals of any stock you own. It can save you from the fate of seeing your dividends cut.
