Shares of the Canadian telecom giant BCE Inc (TSX:BCE) fell 2.3% on Tuesday, after a Globe and mail report showing that the company would not increase its dividend for the next three years. The article, based on a BCE Investor Day presentation, outlined the company’s focus on paying down debt and supporting emerging divisions, which continued dividend increases would conflict with. News of the dividend increase moratorium came just months after BCE cut its dividend in half, which could explain why shares reacted so negatively to the news.
Why it matters
BCE is a classic dividend share. The underlying company rarely grows its profits, but it does earn enough to pay a nice dividend. Historically, investors have earned (or rather expected) a 12% return on BCE stock. The previous dividend and share price theoretically delivered a return around that level. However, the dividend was cut, and even though the stock price fell along with the dividend, the ultra-high BCE yield investors never returned. BCE shares yield about 5.2% today.
Takeaway for investors
The big advantage for investors here is that you can never rush into buying a stock because it looks cheap or high-yielding. If a stock pays $0.50 per quarter, or $2 per year, and costs $20, does it have a 10% return? It certainly has a 10% rolling yield, but if the dividend is cut tomorrow, the investor who buys today won’t get a 10% yield today.
So make sure you always study the fundamentals of any stock you own. It can save you from the fate of a cut in your dividends.
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