Telecom giant BCE (TSX:BCE)(NYSE:BCE) pays investors an exceptionally high yield of 8.5% right now. That’s far higher than normal, and a lot has to do with its struggling share price. In the past 12 months, the stock has fallen by 19% as an increase in interest rates has driven investors away from dividend stocks and into other investments.
At 22 times trailing earnings, the stock also looks modestly priced. But for investors, this is largely a dividend play due to its high payout. And the problem is that the stock’s payout ratio is well over 100%, which suggests that it may not be an ultra-safe dividend stock to own.
Another way to gauge the safety of a dividend is by looking at free cash flow. In the trailing 12 months, BCE’s free cash has totaled $2.9 billion. That’s less than the $3.7 billion it has paid out in dividends during the same time frame. It’s a trend that isn’t sustainable and if it continues, it could lead to a slow down in the dividend growth, or worse, a potential reduction in the overall payout.
BCE did raise its dividend by 3% this year, which seems to suggest it isn’t too worried about the payout right now. But the danger is that a reduction to the dividend may come without warning.
Given its high payout ratio and its relatively low free cash flow, BCE isn’t a dividend stock I’d rely on right now as the payout definitely doesn’t look safe. Investors may want to consider lower-yielding stocks which can be safer investments in the long run.
