Telus (TSX: T) stock has long been a popular name with TSX income investors. For the longest time, it had a yield around 11%, thanks to a combination of persistent dividend increases and equally persistent capital losses. Then in July of this year, the company announced a massive dividend cut, slashing the payout by a whopping 55%. The cut was taken poorly by investors, who sold T stock off in massive volume shortly after the cut was announced. As of this writing, T stock remains down 13.8% from the day when it announced its 55% dividend cut.
Now, if you look at Telus stock today, you might figure that things are safer now than they were before the cut. With the dividend reduced by more than half, Telus has more money to pay interest, invest in its business, and pledge as collateral. Its financial position is presumably better because of the cut. Also, since T stock sold off so much after the cut, the stock still has a pretty respectable yield: with the dividend down 55% and the stock down 13.8%, the former 11% yielder still pays out roughly 6%. That’s certainly not nothing.
Telus definitely improved its financial position when it made its choice to cut its dividend back in July. A company with a lower dividend always has a better cash position than one with a higher dividend, all other things the same. The problem is that even with the cut that Telus made, its financial situation still looks precarious in many ways.
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Telus’ current dividend sustainability
Post-cut, Telus pays a dividend of $0.19 per quarter. That’s down more than half from the previous level. Cutting the dividend by more than 50% would appear to be a decent way to save money. However, Telus’ earnings per share (EPS) was only $0.16 in the most recent quarter. So, even after the cut, Telus still has a problem with paying out more in dividends than it brings in in profit. So, even after the dividend cut and stock selloff, and the expected $2.2 billion per year in cash savings, T stock still looks like it’s pushing it with dividends.
An ETF to hold instead of Telus
The experience that Telus investors have gone through illustrates one of the classic problems of picking individual stocks:
The problem of catastrophic outcomes.
If you hold one stock that suffers a catastrophic business result, your money might never be recoverable. If, however, you spread your money across a diversified portfolio consisting of dozens or hundreds of stocks, then one of those stocks suffering a catastrophe – even going to zero – is not fatal.
It’s for this reason that Canadian investors interested in high yield stocks are well advised to look into high yield ETFs like the Vanguard FTSE Canadian High Dividend Yield ETF (TSX: VDY).
The Vanguard FTSE Canadian High Dividend Yield ETF is an index fund based on FTSE’s high yield Canada index. The fund excludes stocks whose yields are below a certain threshold. So, no speculative tech startups or Junior Miners. The fund holds 60 stocks, which is a pretty decent amount of diversification. It focuses on industries like banking, energy and utilities, which tend to work well in Canada. It has a relatively low 0.22% management expense ratio (management fee), which is not going to eat into holders’ returns too much. Finally, it has a 12-month trailing yield of 2.9%, which is far above average for the TSX. Overall, I’d much rather get my yield from VDY than “put it all on red” with a name like Telus that has a spotty track record.
