Dividend yields north of the 9% level should always be viewed with an extra dose of skepticism. That’s not to say that all artificially high yields (or stocks that only have a high yield due to a crash in the share price, rather than by design) are a value trap that will ultimately end in tears for buyers once the inevitable dividend reduction comes in. But, at the same time, extra due diligence when it comes to the hard-hit, at-risk plays is a must since not all strategic turnarounds are met with a V- or U-shaped kind of recovery.
Some stocks that have shed more than 40–60% of their value might have a multi-year or even multi-decade slog ahead of them. And that’s why it makes sense to be cautious, rather than overly greedy, when it comes to bottom-fishing for the fallen, seemingly cheap deep-value plays. In my very humble opinion, I think most of the trouble comes from the kinds of passive income investors who are only in it for the yield and couldn’t care less about analyzing other aspects of the business.
Remember, just because you aren’t in a stock for capital gains potential doesn’t mean you should ignore the growth plan because, at the end of the day, the dividend’s growth trajectory and health depend on the underlying business actually getting things back on track.
Telus stock under pressure
When it comes to stocks with yields well over 9%, Telus (TSX:T) just has to come to mind. Its yield is now at 11.6%. That’s the highest I’ve ever seen it, with shares moving to 52-week lows (and multi-year lows) after Tuesday’s subtle 0.55% dip. It feels like an endless fall for shareholders, and there’s growing concern about what the new CEO will do with that big, fat dividend.
Will a pause on dividend growth be enough? Or is that dividend going to come falling down? It’s unclear, but look for investors to pay close attention to management’s words come conference call time. In my view, a dividend cut would be just another reason for investors to sell shares.
For now, the free cash flow situation seems stretched, but it doesn’t scream out imminent reduction, especially as Telus moves into a telecom environment that sees less intense infrastructure spend. With quite a debt load, though, interest rate hikes from here could hurt that much more. In any case, I think a cathartic dividend trim might take some of the anxiety off the shares. The yield chasers would bail, and I do think that the beginning of a bottom could start to form.
Little room for error, even amid lower expectations
Either way, there’s not a lot of room for earnings stumbles moving forward. And with a new top boss introducing another layer of uncertainty, I do think shares of Telus are only a fit for investors who don’t need the dividend to stay intact. Someone who can hold through more pain, I think, might be the kind of investor who could actually make money in a name like Telus.
