The telecoms can be great investments for when the economy begins to swoon. Though they may not be the most defensive plays in the world (consider utility stocks of consumer-staple plays for that), I still find their towering dividend yields and below-average betas (which entail less correlation to the market) to be intriguing in good times, bad times, and everything in between!
Here in Canada, many dividend hunters are familiar with BCE (TSX:BCE). It’s the top telecom stock to own, and many passive investors may already have exposure via some sort of exchange-traded fund, index fund, or mutual fund. Indeed, BCE stock stands out as one of the TSX Index’s more popular plays, especially among seasoned passive-income investors in or around retirement age.
BCE has a 6.41% dividend yield at the time of writing. It’s not just large; it’s safe. And it could be subject to consistent growth over the next 10 years. Indeed, dividend health tends to go down a bit after breaching the 6% mark. Though BCE could face increasing macro pressures over the coming quarters (it’s very likely to, as Canada tests recession territory), I’d argue management has options it can consider to keep its payout on stable footing.
BCE stock readies for a recession
Recently, Bell announced it’s cutting 1,300 jobs, while closing or selling some of its radio assets. Undoubtedly, BCE’s media division isn’t its strong point, especially in the era of social media and other new tech. The recession has made matters worse for the media business.
As BCE reduces expenditures in its media business, I think the company will have more financial flexibility come the worst of a downturn. In any case, the main attraction to BCE isn’t old-school media; it’s telecom tech — specifically, 5G and 5G+ wireless networks, which, I believe, are still great places to be as an investor.
Though I’m a fan of BCE’s dividend, the valuation leaves a lot to be desired, given the slate of risks. The stock has never been a deep value. At writing, shares go for just north of 21 times trailing price to earnings. That’s quite elevated compared to some of its peers, likely because shareholders are drawn to that dividend.
Though Canadian investors could go with one of BCE’s telecom peers, I’d argue that it may make sense to venture south of the border for cheaper telecoms that boast yields even larger than that of BCE’s.
Verizon: Worth venturing south for more dividend yield?
Verizon (NYSE:VZ) looks compelling these days, as it continues to fall to lows not seen in many years. The stock sports a massive 7.3% dividend yield. That’s almost a full percentage point more than BCE! After shedding more than 40% from its 2019 highs, the dividend is undoubtedly swollen. And it could fall under pressure, even if a recession doesn’t sweep through the U.S. economy anytime soon.
The U.S. telecom scene is extremely competitive. And Verizon has been one of the telecoms that has struggled to maintain its prior dominance. Verizon is still a force in the U.S. telecom scene, but it’s been painful for value investors to see its competitive edge begin to dull a bit in recent years.
Better buy: BCE or Verizon stock?
At this juncture, Verizon stock looks a tad too risky for my liking. You’ll get the higher yield, but at what cost? Personally, I’m a bigger fan of the Canadian telecom landscape. Now is not the time to chase yield. Instead, it may be better to pay up for shares of a company, like BCE, that may be able to offer a bit more in the way of predictability.
