BCE vs. Telus: Which Telecom Belongs in Your TFSA?

For years, Canadian telecom stocks were some of the easiest investments you could make in your TFSA.

They operated in essential industries, had massive barriers to entry, and most importantly, they generated reliable cash flow that supported steady and growing dividends.

In fact, the industry was widely considered one of the best places to find high-quality stocks to buy and hold for the long haul.

However, that hasn’t been the case lately. Over the last few years, the major Canadian telecom stocks, especially BCE (TSX: BCE) and Telus (TSX: T), have come under significant pressure, and their stock prices reflect that.

So now, instead of being obvious long-term holds, investors are starting to ask a different question. Are these telecom stocks actually good opportunities today, and more importantly, if you’re buying one for your TFSA, which one actually makes more sense?

Why telecom stocks are in a tough spot right now

The biggest issue facing telecom companies today actually has nothing to do with their operations. People still need wireless, internet, and data every single day. And as technology continues to increase, we actually need it more than ever.

The real problem BCE and Telus have been facing lately is what it’s costing these companies to stay competitive. Over the last several years, telecoms have been forced into a massive spending cycle, investing heavily in 5G networks and fibre infrastructure at the same time. And that spending wasn’t optional; it was necessary just to keep up.

At the same time, inflation pushed up the cost of building that infrastructure, and rising interest rates made it more expensive to carry the debt required to fund it.

So even though these companies have still been generating tonnes of recurring revenue, a lot of their cash flow was being tied up in capital spending and higher interest costs.

And with free cash flow being used to fund the dividend, any sustained pressure on that free cash flow is where the concern about the sustainability of the dividends starts to show up.

Which stock actually makes more sense for your TFSA?

Right now, one of the biggest differences between the two, which also largely explains the massive difference in yields the two stocks offer, is that BCE already made the tough decision last year to trim its dividend.

And while trimming a dividend is never ideal, it allows companies to reset expectations and bring their payout ratios back to a more sustainable level.

That matters for long-term TFSA investors because now, instead of constantly worrying about whether the dividend is at risk, investors can start focusing on BCE’s business stabilizing, recovering, and continuing to grow over time.

The yield is still solid, currently sitting at roughly 5.3%, but more importantly, it’s sustainable and should support renewed dividend growth in the coming years as BCE continues to grow and strengthen its balance sheet.

So, if you’re looking for a more stable telecom investment today, BCE is clearly the safer option.

Telus, on the other hand, is in a very different position. The yield is significantly higher, sitting at roughly 10.3%, which is why it has been getting so much attention lately.

However, that yield is also a massive red flag. Because when a stock is yielding 10% or more, it’s usually not some significant opportunity. It’s because the market expects something to change.

In this case, the dividend hasn’t been cut, but growth has already been paused, and the payout is sitting at a level that looks difficult to sustain over the long term, especially with Telus’s elevated debt levels.

Plus, on top of the financial concerns about the dividend, with a new CEO stepping in this summer, there’s always the possibility that management decides to reset things early and bring the dividend down to a more sustainable level.

That doesn’t mean it will happen, but it’s a risk that the market is pricing in.

So, while Telus might look compelling for its 10.3% dividend yield at first glance, in the current environment, it comes with significantly more risk. And in a TFSA, where every dollar you contribute is so valuable, stability matters more than chasing the highest yields.