Canada has no shortage of great options when it comes to selecting a dividend stock. Among those great options is Telus (TSX:T), one of the big telecom stocks.
But given the recent news on Telus’ decision to freeze its dividend growth, does that appeal still warrant an investment?
Source: Getty Images
All about Telus
Telus is a telecom stock. That means the company generates a recurring and predictable revenue stream that is backed by the growing necessity of the services it offers.
Normally, that would be enough for Telus to use that recurring revenue stream to fund growth and pay out a dividend. And until recently, it was. Unfortunately, running a telecom is expensive, and expanding a telecom, particularly when it comes to 5G and fibre rollouts, is expensive.
Telus, like its peers, was forced to turn to taking on more debt to fund that growth. That heavy capital expenditure burden compounds when considering the somewhat stubborn interest rate environment the market still faces.
In short, Telus operates a stable business, which is expensive to expand. So then, what’s the issue?
To answer that, let’s talk about Telus’ dividend. The company offers a quarterly dividend that, as of the time of writing, pays out a yield of 8.9%. This makes it a dividend stock that pays one of the highest yields on the market.
If that sounds inflated, it is. That can be traced back to the performance of the stock over the past several years. Specifically, Telus trades down 29% over the trailing five-year period.
That dip swelled the yield and added to Telus’ already rising debt load. As a result, the telecom announced it was suspending its semi-annual practice of increases. Considering that Telus had more than a decade of annual or better-than-annual increases, this doesn’t bode well for income investors seeking growth.
Specifically, with Telus now focusing on its debt, dividend growth won’t be coming anytime soon. And even with the dividend growth frozen, the payout ratio relative to earnings still stands north of 100%. In other words, Telus is still borrowing and relying on cash flow to fund that dividend stock appeal.
That’s not to say Telus still isn’t a viable long-term option. The company is very much a turnaround income play. Debt could still stabilize and drop. If interest rates continue to drop, that could help as well.
Consider this alternative
An alternative to Telus’ inflated balance sheet is Emera (TSX:EMA). Emera is a utility stock, which offers a similar, if not more defensive appeal to owning telecom stocks like Telus.
Emera owns electric and gas facilities across Canada, the U.S., and the Caribbean. The facilities are regulated, meaning that they generate a recurring and stable revenue stream that lasts decades.
This helps to make cash flow predictable, enabling growth investments to be planned. More importantly for income-seeking investors, it means that dividends continue to grow.
In the case of Emera’s dividend, the company offers a quarterly dividend that pays out a 4.3% yield as of the time of writing. This makes it an ideal dividend stock for investors.
The company has amassed nearly two decades of annual bumps to that dividend and continues to forecast increases of 1–2% going forward. Additionally, unlike Telus’ swollen payout ratio, Emera offers a more sustainable high-70% range for payouts.
Emera isn’t just a stable income play. The company is actively investing in growth, including a nearly $20 billion capital plan encompassing the next several years. That investment includes grid updates, largely to its infrastructure in Florida.
What dividend stock are you buying?
Both Telus and Emera are suitable investments for any portfolio, and both offer a strong dividend. The difference for investors comes down to the level of acceptable risk.
Telus has more volatility and a much higher yield. But that yield comes with the risk of it being cut at some point in the future, in addition to the freeze already in place.
Emera, on the other hand, offers a safer dividend that comes with a lower yield and a plan to grow earnings.
