Canada’s big telecom stocks represent some of the best options for investors to generate a reliable passive income stream. That being said, not all of the big telecoms are equal when it comes to dividends.
The one telecom that investors should be paying attention to when it comes to generating passive income is Telus (TSX: T).
Here’s a look at the telecom and why it’s the option to build out an income stream right now.
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Telus is a great option for income and growth investors
Canada’s telecom stocks benefit from a lucrative business model that caters to both growth and income-seeking investors.
That’s because they offer a subscription-based business model that provides increasingly necessary services to customers across the country. For Telus, that includes wireless, wireline, internet and TV services.
In recent years, the defensive appeal of those services has only grown, opening a unique path for the telecom to pursue growth.
Concurrently, Telus offers investors growth appeal, too. Telus’ core growth stems from investments into its network. Telus is constantly expanding and building out its wireless infrastructure. That in turn supports customer additions, higher-value bundled services and ultimately better retention.
And that’s just half of the growth story.
Telus is also pushing into digital services, offering solutions in niche markets of the economy, such as healthcare and agriculture. The aim there is simple. Building out recurring, higher margin revenue streams that won’t replace the core subscription business but become complementary to it. It’s a shift from pure-play telecom to a broader, digital services platform.
In summary, across all of its streams, Telus generates a predictable revenue stream that leaves room for Telus to invest in growth initiatives, while also paying one of the best dividends on the market.
This makes Telus a unique, if not ideal mix of scale, stability and yield for investors.
Telus offers an appealing dividend and some risk
One of the biggest reasons investors look to Telus is for its dividend. As of the time of writing, Telus offers investors a quarterly dividend that carries a yield of 9.9%.
That yield is far above any of Telus’s big telecom peers, and handily one of the largest payouts on the market. While the yield reflects the company’s commitment to returning capital, it also highlights the current struggle the telecom is facing.
Telecoms are capital-intensive investments. Building out a 5G network costs billions, and telecoms like Telus rely on borrowing to fund those upgrades.
Following years of higher interest rates, the cost of borrowing surged. This, coupled with investor rotations out of Telus, led the telecom to shed over 30% of its stock price in the past five years.
As a result of the stock price dropping, the yield shot up.
This led to management slashing costs and pausing further dividend increases. That’s less than ideal for Telus over the shorter term, but the company is making the right steps to ensure long-term gains.
In short, Telus is trying to protect its dividend and rebuild financial flexibility, but the current share price and yield point to that taking some time.
How $3,000 in Telus can generate passive income
Investors looking to capitalize on that ultra-high-yield and generate some passive income should consider a small investment in the telecom.
Given the current yield, even a $3,000 position in the stock will provide an income of nearly $300. That’s not enough to retire on, but it is enough to generate a new share each month from reinvestments alone.
This means that while Telus waits for the market to acknowledge its recovery and value, investors can significantly increase their position without new investment. And when Telus does recover, investors will have a passive income machine ready to start paying.
In my opinion, Telus should form a small part of any well-diversified portfolio.
Buy it, hold it, and watch your portfolio (and future passive income) grow.
