When it comes to dividend investing in Canada, telecom stocks like Telus (TSX: T) have always been some of the most popular options.
Telus has a tonne of advantages that make it such a compelling dividend stock. It’s a massive, $28 billion company, it operates in an essential industry, and right now, it offers a yield that looks incredibly attractive on the surface.
In fact, that yield is exactly why so many investors are being drawn to it at the moment. Because when you see a stock offering 9.5% or more, it can feel like an opportunity to lock in a tonne of income for years to come.
But the problem is, high yields don’t always mean high-quality opportunities. In fact, it’s usually the opposite. Because when a yield gets that high, it’s often a clear sign that the market is pricing in risk. And the higher the yield climbs, the more risk the market sees to that dividend.
Now, that doesn’t mean Telus is a bad company. But in the current environment, it’s in a position where its financial flexibility is more limited, and that’s something income investors need to pay attention to.
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Why Telus may not be the best dividend stock to buy right now
The biggest issue with Telus today isn’t the business itself; it’s the current situation it finds itself in. The company has been dealing with higher debt levels and elevated interest rates, which have put pressure on its financials.
And as a result, management has had to make some adjustments, one of the most important being the pause in dividend growth.
That’s a big deal, because when you’re investing in dividend stocks for the long haul, it’s not just about the yield today, it’s about how that income grows over time. And if the dividend isn’t increasing, you’re effectively losing purchasing power to inflation.
On top of that, in recent years, Telus has relied on its dividend reinvestment plan to help support its payout, which means issuing new shares at a discount. And while that helps maintain the dividend in the short term, it also leads to dilution for existing shareholders.
So, while the dividend yield looks attractive, it’s not as straightforward as it seems.
At this point, Telus is at more of a wait-and-see stage, and in a market where there are still opportunities to find both income and growth, that’s not always the best place to be.
A cheaper stock with more growth potential
Instead of Telus, if you’re looking for a high-quality dividend stock that generates reliable, recurring cash flow with much more long-term growth potential, Brookfield Renewable Partners (TSX: BEP.UN) looks much more compelling right now.
While Telus is focused on stabilizing its balance sheet, Brookfield is still actively growing and doing so in one of the most important industries going forward, renewable energy.
Brookfield owns and operates a massive portfolio of renewable assets around the world, including hydro, wind, and solar. These are long-life assets that generate stable, predictable cash flow and are often backed by long-term, inflation-linked contracts.
But more importantly, the demand for these assets is only increasing. And a big part of that is coming from the rapid growth of data centres and cloud computing, which is driving a huge increase in energy demand.
That creates a massive long-term tailwind for the entire industry. On top of that, Brookfield has already demonstrated a consistent ability to grow its funds from operations year after year, which allows it to continually increase its dividend as a result.
Therefore, although Brookfield’s current yield of 4.7% is lower than Telus’s, it’s actually growing. In fact, for 15 straight years, the stock has increased the dividend by more than 5%. So, over the long haul, Brookfield offers a better combination of capital gains potential and a sustainable dividend
Because investing isn’t just about collecting income, it’s about building a portfolio of businesses that generate a stream of income that continues to increase.
So, while Telus will likely stabilize and eventually return to growth, that could take time.
And in the meantime, there are better opportunities to own businesses like Brookfield that are already growing, already increasing their payouts, and positioned to benefit from long-term trends.
