Why This Dividend Stock Is My Pick Over Telus and BCE

Telus Corporation (TSX:T) has joined BCE (TSX:BCE) in the dividend game, as the cash flow that funded these dividends has come under strain. A few advantages Telus had over BCE in dividends are now gone, and both are on par. Both now have a 5.6% annual dividend yield, have ended the discount they offered on the dividend reinvestment plan (DRIP), and reduced the long-term payout ratio.

Even after slashing dividends, telecom stocks have a long way to go in their recovery. Both are targeting reducing their net debt to 3 times its adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). BCE is targeting to achieve this ratio by 2030 and Telus by 2028. Until then, I do not see any signs of dividend growth.

Why this dividend stock beats Telus and BCE for me

If a 5.6% dividend yield is the hook to invest, I would rather invest in Enbridge (TSX:ENB) for three reasons.

• Dividend growth and payout ratio
• Leverage ratio
• Profit and cash flow margins

With a 5.4% yield, Enbridge has a low-risk business model as there is no competition and it continues to enjoy the same toll rates. BCE and Telus also had similar moats until regulatory changes opened the fibre infrastructure to competitors. Enbridge won’t see such regulations, as oil and gas transmission is midstream. It is not involved in the retail distribution of oil and gas, except for its utilities business where rates are regulated.

Enbridge expects to grow its dividend by 5% from 2027 onwards. Although it has paused its DRIP, the quarterly dividend can be used to buy other stocks tax-free in a Tax-Free Savings Account (TFSA).

Safer dividend growth

You can be assured there won’t be a dividend cut, as Enbridge has maintained its long-term dividend payout ratio of 60–70% of distributable cash flow (DCF). Enbridge builds pipelines, and as soon as they become operational, it starts earning toll money, which is used to pay loan interest expense and operating expenses. What is left is DCF, a portion of which goes to shareholders as dividends.

With several projects scheduled to come online between 2027 and 2028, depreciation will surge and so will DCF.

Leverage ratio

Given Enbridge’s business model, it has a higher debt-to-EBITDA ratio of 4.7 times, which is within its target range of 4.5–5 times. BCE and Telus have a lower target ratio of 3 times and 2.7 times their EBITDA, respectively, because their infrastructure needs frequent upgrades. Meanwhile, Enbridge’s infrastructure has a longer lifecycle than BCE and Telus’s fibre network. This helps Enbridge make money even from legacy pipelines that have already been paid off.

Profit and cash flow margins

Looking at the free cash flow of each of the three companies, Enbridge’s distributable cash flow is 19% of its revenue. For BCE and Telus, FCF is less than 10% of their revenue.

All the above factors make Enbridge a better stock at a 5.4% yield.