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It's impossible to think of a telecom stock without focusing most of your attention on dividends.
After all, telecom companies are cash geysers, gushing dividends that yield an average of about 4.5 per cent in the case of the big players. That's hard to ignore.
Meanwhile, there doesn't seem to be much else going for these stocks beyond dividends right now: Big share price gains have already happened, competition is intense in the wireless industry, and fixed-line phones and cable TV aren't exactly high-growth areas.
So the question becomes: Is a telecom stock worth buying for the dividend alone? For many investors, the answer is yes – and not just because of where the dividend is, but where it is going.
The track record for dividend increases among the three biggest companies in the sector – BCE Inc., Rogers Communications Inc. and Telus Corp. – is impressive.
Since BCE reinstated its quarterly dividend in 2009, following a messy takeover deal that ultimately fell apart, it has raised its dividend seven times and boosted the overall payout by nearly 50 per cent. Telus has raised its dividend at least once a year since 2004.
Even so, payouts are still relatively conservative next to strong earnings.
But the bigger attraction here is that telecom stocks are among the few high-yielding plays that also show signs of big dividend increases in the years ahead. (Those other magnets for dividend-seeking investors, the banks, have had spotty records in recent years due to the financial crisis and shifting international regulations.)
George Vasic, a Canadian strategist at UBS, pointed out that high dividend yields used to be a sign of weak dividend growth. But that relationship no longer holds true: Now, high-yielding stocks are the ones with the best dividend growth prospects.
"This implies it is now more possible to get both yield and growth," Mr. Vasic said in his note.
He came to this conclusion after looking at stocks within the S&P/TSX 60 index whose dividend yields and expected annual dividend growth rates through 2015 added up to at least 10 per cent. He found just nine names, and three of them were high-yielding telecom stocks.
Rogers was on top with the highest combined yield and growth rate. Telus, which recently said that it would crank out a dividend increase every six months until at least 2013, ranked third. BCE ranked seventh.
Scoff if you want at stodgy dividend-payers, but they come with an added benefit beside quarterly cheques: As dividends grow, share prices tend to grow with them.
Read David Berman's Market Blog at tgam.ca/marketblog
David Berman