With the Bank of Canada serving up yet another interest rate cut, questions linger as to what the next big move for the TSX Index will be after a S&P-topping year (at least so far). Undoubtedly, the pace of the rate cuts could slow down, and perhaps reverse course. It’s really hard to tell, and for a new investor who’s a bit confused as to how to proceed next, now that GIC (Guaranteed Investment Certificate) rates worsen further (the big banks might offer less than 3% for a 12- or 14-month term) and demand for them looks to sink.
Of course, there are far more bountiful ways to score higher yields for those willing to take on some risk. And while rate cuts are bad news for the risk-free rate and risky yields over the medium term, I certainly wouldn’t be afraid to look after some of the higher-yielding REITs (real estate investment trusts) out there as lower rates stand to boost share prices, which, in turn, bring down yields by quite a bit. The same goes for the dividend stocks, and in this piece, we’ll explore one opportunity within the higher-yielding scene that I think won’t stay cheap and yield-rich for very long.
Telus
Telus (TSX:T) has to be a name that yield lovers look to in the face of lower rates, where the hunt for higher (but steady) yields could get a lot tougher. Shares of the hard-hit telecom are going for $20 and change and seem little moved by the latest rate cuts from the Bank of Canada. With shares on the rapid retreat again, the name looks to be in the danger zone if you’re an investor or trader who pays a lot of attention to the technical picture.
Where some see a falling knife destined to wipe out wealth, though, others see a contrarian opportunity to go against the grain while getting paid richly for doing so. At the time of this writing, the yield stands at 8.12%. That’s an impressive yield that also looks far safer than most other dividend payers with similarly swollen dividend yields. Whether shares revisit multi-year lows again remains a big question. I think there’s a realistic chance over the short term, especially as negativity begets even more negativity.
Either way, I think the dividend is the real deal and wouldn’t be so quick to dismiss the sustainability of the payout, given Telus’s long-term dividend growth track record. Even if things get worse and the dividend is put on the ropes, I’m not so sure how much more time in the penalty box, so to speak, the telecom has left to serve. Shares are battered and are already down more than 40%.
High yield, but at what cost?
Of course, it’d be nice to wait for management to turn things around first, but by then, you’d probably get a yield well below 7% rather than above 8%. As such, I like the risk/reward tradeoff, but only for yield hunters willing to see their investment in the red for a while longer. Personally, I think rate cuts have not yet been factored in by investors. Perhaps Telus needs to show it can gain a big share in the telecom scene amid tremendous competitive pressures. Though Telus’s fundamental story is far from perfect, I wouldn’t turn against shares with such a big, fat yield, especially given the low bar going into earnings.
