Right off the bat, what do you think of a dividend stock that has slashed its quarterly payouts by more than 50%? Typically, I would consider such a shock to dividend distributions a sign to steer clear of the dividend stock, but what if that stock is BCE Inc. (TSX:BCE)?
BCE stock is a well-known stock and one of the biggest names in the Canadian telecom industry. A blue-chip stock from a defensive industry slashing its dividends can be alarming, but understanding the root cause might help you see it differently.
In May 2025, the company’s management announced a dividend cut. While that made many investors feel wary of investing in the stock, the move might have been the best decision for shareholders who know better than to sell in a panic. The high-yielding dividends it was offering were simply dragging the stock down by affecting its fundamentals.
Slashing the dividends might have caused impatient investors to take money out of the stock. For patient investors, the stock is still worth a closer look.
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The reason for slashing dividends
BCE stock has been a staple holding in many investment portfolios as a reliable income-generating asset. It paid high-yielding dividends and enacted dividend hikes year after year. The 56% slashing of its dividends rocked the boat and many long-term investors did not appreciate that.
Those who had a better look at the situation might see that as a smart move. Back in 2020, BCE borrowed a ton of capital to invest in its fibre optic network expansion. However, the interest rates at that time were close to zero. The sudden hike in key interest rates to control inflation threw things into chaos.
Higher borrowing costs weighed on BCE stock and its balance sheet. Suddenly, BCE was carrying significant spending commitments and a debt that grew much faster than anticipated. Since then, competition has also increased.
BCE found itself paying out over 100% of its free cash flow in dividends, prompting the company’s management to borrow more to cover the gap. Instead of using the cash to pay debt, it was taking on more. The approach would not have been sustainable.
BCE CEO, Mirko Bibic, and the company’s board decided to slash the quarterly payouts to immediately bring the payout ratio down to manageable levels. The company also expanded its US fibre expansion by partnering with the Public Sector Pension Investment Board, increasing its growth potential without additional debt.
This is the year the company expects to see more excess cash to pay down debt and fund its growth. The company’s CEO told investors that it plans to return around $5 billion in dividends over the next three years.
Foolish takeaway
The dividend cut definitely must have stung investors, especially those who have held its shares for a long time. However, the high-yielding distributions were becoming untenable, and bringing that cost down has set the stock up for better performance in the coming quarters.
As of this writing, BCE stock trades for $32.11 per share and boasts an annualized 5.5% dividend yield that you can lock into your self-directed portfolio today.
