With a dividend yield that continues to climb, and now sits just below 10%, it’s no surprise that Telus (TSX:T) is getting a tonne of attention from income investors right now.
At first glance, that kind of yield can look like a major opportunity. However, when yields get that high, it’s usually not because the dividend has suddenly become more attractive. It’s because the stock price has fallen, and typically, that happens for a reason.
And in Telus’s case, those concerns are real. The company is currently dealing with elevated debt, a stretched payout ratio, and slowing growth across the telecom sector.
So, while the dividend hasn’t been cut yet, it has stopped growing, and there is increasing concern from the market that it could need a reset.
That’s why income investors have to look beyond just the headline yield when looking at dividend stocks to figure out how reliable that income actually is.
Because if your goal is to buy high-yield stocks, you don’t need to take on that kind of risk just to maximize your income. Plenty of other dividend stocks offer strong income, but with very different underlying business models, like Diversified Royalty Corp (TSX:DIV).
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Why this high-yield stock could be better than Telus for dividend investors
In addition to the fact that Diversified Royalty isn’t facing significant headwinds at the moment, one of the biggest reasons it’s a top pick for income lovers is how it generates its income.
Unlike Telus, which has to constantly invest billions into infrastructure just to maintain and grow its network, Diversified Royalty doesn’t operate businesses directly.
Instead, it owns the trademarks and royalty rights to a portfolio of well-known brands like Mr. Lube, BarBurrito, and Oxford Learning.
So instead of relying on profits after expenses, it collects a percentage of top-line revenue from those businesses. That’s crucial because while most companies generate income based on what’s left after costs, Diversified Royalty gets paid based on overall sales.
That means that even if a partner’s margins get squeezed, the royalty stream still holds up as long as customers keep showing up.
In addition, Diversified Royalty is built to return the majority of its cash flow to investors. That’s why it can consistently pay such a significant dividend, which has reached as high as 8.8% over the last year. Today, you can buy it at a yield of roughly 6% with far less risk than Telus.
Why the income can hold up in tougher environments
Now, less risk doesn’t mean no risk. If consumer spending slows, that will impact Diversified Royalty’s revenue.
However, the difference is that even if spending slows, revenue may decline modestly, but it won’t suddenly disappear because many of the brands it partners with are intentionally tied to everyday spending.
For example, people still need oil changes, and services like education support don’t just vanish in a weaker economy.
We’ve already seen that play out during the pandemic. Even when large parts of the economy were shut down, the company’s royalty streams didn’t disappear. They were impacted, but they continued to generate income.
And more recently, the business has continued to show steady momentum. Revenue has been growing, thanks to expansion from its existing partners as well as new agreements that lock in long-term royalty streams.
So, while Telus may still appeal to some investors, especially if it can stabilize its balance sheet and return to growth over the next few years, there’s no question the high yield it pays comes with a tonne of risk today.
Diversified Royalty, on the other hand, offers a completely different kind of opportunity, with its model built around generating consistent cash flow from top-line revenue, which is why it’s a stock that’s perfect for income lovers.
