Is TELUS Stock a Buy for Its 7% Dividend Yield?

TELUS stock looks pretty enticing with a 7% dividend yield. But what else should investors consider?

Amy Legate-Wolfe ❯

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published October 30, 2024 4:30 pm EDT

TELUS (TSX:T) stock has long been a dividend winner, currently offering a dividend yield of around 7%. This certainly presents an attractive option for dividend investors. This high yield, however, comes with a few considerations that you’ll want to weigh carefully. So today, let’s dive into whether that dividend yield is worth it, or worth a wait.

Some background

TELUS stock has a strong history of dividend growth, with the company’s dividend increasing consistently over the years. As of October 2024, TELUS’s forward annual dividend rate is $1.56 per share. The company has maintained a solid payout streak despite challenging market conditions. In terms of earnings, TELUS delivered solid performance in Q2 2024, with 14% year-over-year growth in quarterly earnings, plus a 5.6% increase in earnings before interest, taxes, depreciation and amortization (EBITDA).

Despite these improvements, the company is projecting to hit the lower end of its 2024 revenue targets due to competition in the telecom industry. Still, its focus on long-term EBITDA growth and efficiency measures provides some reassurance about the sustainability of its dividend.

However, despite the company’s growth initiatives, TELUS faces some financial challenges. The company’s high debt load of over $29 billion as of the most recent quarter puts pressure on its ability to invest heavily in future growth, all while maintaining such a high dividend. Furthermore, its payout ratio is very high, at nearly 284%. This suggests that a substantial portion of its earnings goes toward dividends, limiting room for future hikes unless earnings significantly improve.

Further considerations

The dividend yield of 7% is undeniably appealing for income investors, especially in the current low-interest environment. However, it’s important to consider the risks. The telecom sector is capital-intensive. With TELUS stock working to balance investments in 5G infrastructure, healthcare, and agriculture there’s some uncertainty about whether it can sustain both its capital expenditures and dividend at these levels, all while managing its large debt.

Yet TELUS stock’s recent collaboration with Google Cloud and Onix has added a new dimension to its growth strategy. This partnership is set to modernize TELUS’s data handling and artificial intelligence (AI) capabilities, enabling them to offer faster, more efficient services. This could be a key factor in driving future revenue and reducing costs, particularly in its health and agriculture segments, which have already shown growth potential.

Plus, TELUS stock’s consistent dividend history and commitment to shareholder returns do make it an attractive stock for dividend investors. The partnership with Google Cloud and Onix could accelerate TELUS’s transition into more tech-driven sectors, thereby adding growth opportunities beyond traditional telecom services. For long-term investors, this could support future dividend stability and possibly even growth.

Bottom line

TELUS stock is a solid option for dividend seekers looking for high income. The company’s yield is impressive, but be mindful of the associated risks, particularly its high payout ratio and leverage. TELUS’s future looks promising with its innovative collaborations. Yet continued strong execution will be crucial to maintaining both its growth trajectory and dividend payouts.