What’s Actually Going On With Telus’s Dividend?

The 11% dividend yield has met its fate. Telus Corporation (TSX:T) was boasting a 9-11% dividend yield as the market was pulling off petals: “will cut dividends” or “won’t cut dividends” until the answer was finally out on July 31. It’s official: Telus has slashed dividends by 55%, paused the 2% dividend-reinvestment plan (DRIP) discount from October 1, 2026, and reduced the long-term dividend payout ratio to 45-60% from 60-75%. That’s too much to take … or is it?

A year ago, BCE (TSX:BCE) announced the same changes. It paused the 2% DRIP discount on dividends payable on July 15, 2025. Instead of treasury stocks, the company began buying shares from the open market for DRIP. It slashed the annual dividend by 56% and reduced the long-term dividend payout target to 40%-55% of free cash flow (FCF) from 65%-75%.

Even though Telus adopted a different strategy to tackle price competition, it could not escape the need to invest in artificial intelligence (AI) despite a highly leveraged balance sheet.

What’s actually happening with Telus’s dividend?

A company pays dividends from the free cash flow (FCF) left after servicing debt and capital expenditure requirements. Until 2022, Telus had the pricing power that increased FCF and supported dividend growth. But the aggressive price competition from 2023 to 2025 harmed the margins and FCF.

Still, the management thought it would reduce capital expenditure and focus on debt repayment to increase its FCF. However, it was paying more than 100% of free cash flow in dividends after adding DRIP dividends.

Telus reports dividend payout net of DRIP. Hence, 75% of its FCF, or $1.63 billion, is actually paid out in cash dividends. The $860 million paid out in DRIP shares only defers dividend payments to a future date.

How will your Telus dividend be affected?

If you have been blinded by the 11% yield and bought Telus stock in bulk, your dividend payouts are about to nosedive. For the first two quarters, Telus paid $0.4184 in quarterly dividends, but for the next two quarters, it will pay $0.1875. This reduces the annual dividend per share for 2026 to $1.21 ($0.4184 + $0.4184 + $0.1875 + $0.1875). For 2027, the annual dividend will be $0.75 ($0.1875 x 4 quarters), assuming no more dividend cuts.

A person owning 1,000 shares of Telus will see their annual dividend fall by 54% from $1,637 in 2025 to $750 in 2027.

Considering Telus shares were trading at $22 back in 2025, 1,000 shares would have cost you $22,000, and a $750 dividend is just a 3.4% dividend yield. And don’t forget the value of your investment has reduced to $13,500.

What’s next for Telus’s dividends?

Note that Telus has reduced its long-term dividend payout target to 45%-60%. In 2025, it spent $1.63 billion in cash dividends net of DRIP, which will reduce to $733 million in 2027.

Telus has also reduced its 2026 FCF guidance from $2.45 billion to $1.8 billion and expects to grow FCF by 10% annually from the new base. The dividend cut will help reduce the cash dividend payout ratio for 2027 to 37% if the company actually meets its FCF guidance.

However, BCE’s restructuring has taught us that FCF is affected in the short term by restructuring costs and lost cash flows from discontinued operations. I expect Telus’s dividend will remain $0.75 for at least two years until restructuring is over and cash flows have stabilized.

Final takeaway

To buy or not to buy Telus shares at the new 5.54% dividend yield is a decision not to be taken in haste. There are many moving elements. It’s time to be patient and avoid taking new positions until there is clarity. The new corporate strategy will determine whether it is a turnaround stock with immense capital appreciation or whether it has further downside before a rally.