A dividend stock with an 8.12% yield that could benefit from recent Bank of Canada rate cuts

With the Bank of Canada teasing yet another rate cut, questions remain about what the next big move for the TSX Index will be after an S&P banner year (at least so far). Undoubtedly, the pace of rate cuts could slow and perhaps change course. It’s really hard to say, and for a new investor who is a little confused about how to proceed, as GIC (Guaranteed Investment Certificate) rates continue to deteriorate (the big banks may be offering less than 3% for a twelve or fourteen month term) and demand for them appears to be falling.

Of course, there are many more plentiful ways to earn higher returns for those willing to take some risk. And while rate cuts are bad news for risk-free rates and risky returns over the medium term, I certainly wouldn’t be afraid to look at some of the higher yielding REITs (real estate investment trusts) as lower interest rates can boost share prices, which in turn drives yields down quite a bit. The same goes for dividend stocks, and in this piece we explore an opportunity within the higher-yield scene that I don’t think will remain cheap and yield-rich for long.

Telus

Telus (TSX:T) should be a name yield enthusiasts look at in light of lower interest rates, where the hunt for higher (but stable) yields could become a lot more difficult. Shares of the hard-hit telecom company are trading at $20 and changing and appear unimpressed by the Bank of Canada’s latest interest rate cuts. With shares in rapid decline again, the name appears to be in the danger zone if you’re an investor or trader who pays close attention to the technical picture.

While some see a falling knife destined to wipe out wealth, others see a contrarian opportunity to go against the grain, while being handsomely paid to do so. At the time of writing this, the return is 8.12%. That’s an impressive return that also looks much safer than most other dividend payers with a comparably high dividend yield. Whether shares will hit multi-year lows again remains a big question. I think there is a realistic opportunity in the short term, especially since negativity breeds more negativity.

Regardless, I think the dividend is the real deal and I wouldn’t be so quick to dismiss the sustainability of the payout given Telus’ track record of long-term dividend growth. Even if things get worse and the dividend is at risk, I’m not sure how much time the telecom has left to serve in the penalty box, so to speak. The shares are battered and are already down more than 40%.

High yield, but at what price?

Of course, it would be nice to wait for management to turn things around first, but by then you’ll likely get a return well below 7% rather than above 8%. That’s why I like the trade-off between risk and return, but only for return hunters who are willing to see their investment in the red for a while longer. Personally, I don’t think interest rate cuts have yet been taken into account by investors. Perhaps Telus needs to show that it can gain a large share of the telecom world amid enormous competitive pressure. While Telus’ fundamental story is far from perfect, I wouldn’t turn against stocks with such a big, fat yield, especially given the low bar for earnings.