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TFSA (Tax-Free Savings Account) investors hungry for passive income plays shouldn’t hesitate to explore some of the higher-yielding dividend plays that have opened up in recent years. Undoubtedly, it’s never a good idea to chase yield mindlessly.
Often, dividend yields significantly higher than that of historical averages result from a firm that may have lost its way. As a value investor, it’s your job to ask yourself if what’s weighing down the stock under question are temporary headwinds that can be overcome with time. If not, a high-yield play that appears to be rich with deep value may actually be a value trap. Undoubtedly, it’s the long-term fundamentals that matter most. Short-lived macro headwinds and quarterly fumbles are fine as long as the firm’s long-term edge is still in play.
In this piece, we’ll look at one long-time dividend hero in Telus (TSX:T) stock. Though the telecom scene is popular for its historically elevated dividend yields and somewhat decent amount of capital appreciation over the long run, the high-rate environment has really taken a toll on Canada’s top industry players (the Big Three, as they’re often referred to in the media).
Though Telus has been doing relatively decently in recent quarters, at least comparatively, the stock remains down in the ditches, with a yield that’s quite appealing at 6.33%. Of course, yields well north of 7% aren’t uncommon in the telecom scene, at least not these days.
Higher yields are out there, so why settle for Telus as a TFSA passive-income pick?
After sinking below $50 per share, fellow telecom rival BCE sports a yield north of 8%. Additionally, if you’re okay with venturing south of the border, Verizon boasts an impressive dividend yield of around 6.8%, with some newfound momentum behind it (VZ shares up over 20% since its 2023 lows).
Given the higher yields in alternative telecoms today, why bother with Telus stock? It has a relatively small yield compared to some of its harder-hit peers. And with shares up just 8% or so from their 2023 lows, there isn’t as much momentum behind the telecom titan as recent negative momentum threatens to drag shares back toward 52-week lows of around $21.50 per share.
Of course, Telus stock carries its own set of risks. And at 23.3 times forward price to earnings (P/E), the stock isn’t exactly a deep-value bargain.
So, what makes the name an intriguing candidate for a TFSA fund?
I think Telus could grow its dividend at a quicker rate than the industry average over the next five years. The company can outpace its peers as newcomers to Canada look for affordable (but speedy) wireless internet plans. Looking ahead, I’d be unsurprised if Telus can hike its dividend by the high single-digits through what remains of these heavy industry headwinds.
All considered, Telus is a fine balance between long-term dividend growth and upfront yield. Though pressures could persist through the year, I must say I’m more confident in the firm’s abilities to navigate the current climate. Telus stock’s a buy, at least in my books.
