How do you define a dividend stock as magnificent? A company that has stable free cash flow after servicing debt and reinvesting in the company’s growth. A company that has a Plan B when things go south. These companies take calculated risks and alter their growth plans to ensure their cash flow remains sustainable. Investors also buy these stocks for their stability and not because of their risk-taking capability. When such stocks have a high yield, does it demand caution?
Is high dividend yield a good thing?
A dividend yield is calculated as the annual dividend per share as a percentage of the share price. If you buy a $100 stock that gives you $8 in annual dividend, the stock has an 8% yield. This dividend per share is what investors expect the company to give in the coming year. Any change positive (dividend growth) or negative (dividend cut) can impact the stock price.
A classic example of how dividend expectations influence stock price movement is BCE (TSX:BCE). Its stock price fell 39% in the last 12 months. Bank of America Securities analyst downgraded the stock, saying that the company should cut dividends as its expected dividend payout ratio is unsustainable.
The analyst stated that BCE’s restructuring actions could improve growth over the long term. However, the management has not yet provided a clear strategy on how it plans to tackle debt and reduce its dividend payout ratio to its target range of 65-75%. To give you a background, BCE’s dividend payout ratio has grown from 108% in 2022 to 111% in 2023 and now it is expected to reach 120% in 2024.
The growing payout ratio means the company is paying dividends from its cash and cash equivalents of $1.77 billion. It spent $3.49 billion on dividend payments. These figures are as of December 2023. The 2024 figures could be more alarming given that restructuring has reduced its free cash flow by 3-11%.
While BCE can grow with the 5G revolution, the company might have to accelerate its debt-repayment strategy. Analysts are not convinced that a pause in dividend growth is enough to address the 120% payout ratio headwind.
Should you buy this magnificent dividend stock while it is down 39%?
Analysts are calling on the company to cut dividends. Investors seem to have priced in a 40% dividend cut. Hence, the stock price is down 39%. As BCE expects to pay a $3.99 dividend per share in 2025, the decline in stock price has increased its yield to 11.87%. If the company decides to cut its annual dividend per share by 40% from $3.99 to $2.39, the dividend yield could fall to 7.1% as per the current stock price of $33.62.
When you see BCE stock in the light of a dividend cut, 7.1% is a good yield. A dividend cut could give BCE’s stressed cash flow some breather, allowing it to channel cash into restructuring and debt repayment.
Things to keep in mind when investing in BCE
BCE is a good company with strong long-term growth potential. However, the short-term headwinds could keep the stock volatile. While investing in BCE, you should adopt a long-term approach with a minimum investment horizon of five years.
If you are worried about a dividend cut, it is a good thing for BCE, as one has to take a step back to take a big jump forward. The current dip could be a good buying opportunity to accumulate shares of BCE by investing $200-$300 every month. Every dip will reduce your average cost per share.
| Year | BCE Dividend per Share | Percentage of Growth |
| 2012 | $2.22 | 8.6% |
| 2011 | $2.045 | 14.6% |
| 2010 | $1.785 | 13.0% |
| 2009 | $1.58 | 116.4% |
| 2008 | $0.73 | -48.8% |
| 2007 | $1.425 | 8.0% |
When BCE jumps forward with a stronger balance sheet and a higher free cash flow, you could benefit from accelerated dividend growth in the first few years. If we look at the history, the company reduced the dividend frequency to half-yearly from quarterly, thereby halving dividends in 2008 — the year of the Great Financial Crisis. However, it jumped forward with 116% dividend growth the next year.