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

BCE (TSX:BCE) and Telus (TSX:T) have massive dividends that might be worth the added risk.

Key Points
  • Canadian telecom stocks BCE and Telus look beaten down, but heavy competition and new disruption risks (like satellite connectivity) make this a shaky place to buy even for contrarian investors.
  • Telus’s 11.5% yield looks like a dividend-cut warning sign, while BCE’s 5.8% payout seems safer but still faces big spending needs and uncertainty—so it’s more “wait for clarity” than “buy now.”

It’s been tough to own BCE (TSX: BCE) and Telus (TSX: T), and while most other investors think about dumping their positions, it might make sense to take a contrarian view, even if rock-bottom isn’t quite in the cards just yet. Indeed, the Canadian telecom industry has been very competitive and filled with uncertainties.

While the worst of headwinds might already be baked into the share price, I still think that competitive threats from the likes of Freedom Mobile, as well as satellite connectivity plays, still make for a rather uneasy hold, even for established blue chips like BCE and Telus.

man looks worried about something on his phone

Source: Getty Images

Telus: The bigger of the two high-yielding heavyweights

Of course, the main draw to shares of Telus lies in the 11.5% dividend yield. But, really, who knows how long that payout will last? I think the dividend is getting significantly less sustainable with every dive that the shares take. Now going for $14 and change per share, Telus is, once again, a fast-falling knife, and it’s unclear when it’ll be safe to get back in.

While the dividend could survive, I’m starting to think that a dividend reduction ought to be braced for before even thinking about purchasing a few shares. And for those who are bullish on the way down, I’d much rather average down rather than load up all in one go because the shares may very well reach single-digit territory, an unprecedented move that might not be all too far off, especially given the trajectory of the shares. The stock has now imploded by around 58% from its highs.

With the CEO transition going on behind the scenes at a very tough time for the company, while the double-digit percentage yield flashes red lights that scream “too good to be true,” I do think that a dividend cut is already priced in at this juncture. With no legacy media business to worry about, though, Telus might have something over its peer BCE. Still, telecom is an uncertain place to be, especially if Elon Musk’s Starlink is ready to beam down data from space in a way that could disrupt cell towers in a profound way.

Of course, cell towers will always have the edge due to their proximity. That is, unless Musk and company develop something that catches telecoms off guard. In light of that risk, I’d be very hesitant to buy right here in spite of the oversold conditions.

BCE: A safer payout, but jitters remain

BCE’s 5.8% dividend yield looks far more sustainable, and recent layoffs could be enough to help the firm seize new opportunities to boost cash flows. As Canada looks to bolster its AI data centre moat, perhaps BCE might have a way out of its sticky situation. There’s only one problem: it costs money to get into the game, and the cash flows come later, perhaps much later.

With telecom threats looming, I think BCE is more of a hold than a buy. We all know how CapEx-intensive AI infrastructure can be. And if things don’t get better on the wireless side, perhaps a second dividend reduction cannot be ruled out in the next five years. As for which telecom belongs in your TFSA, I hesitate to pick one until the dust has a chance to settle. Personally, I’d hold off until there’s more clarity on the road ahead. There might be deep value, but there are also astronomical risks at such a pivotal moment.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

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