Written by Andrew Walker at The Motley Fool Canada
BCE (TSX:BCE) is down about 14% in the past six months. The drop in the share price has investors wondering if BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income or a Registered Retirement Savings Plan (RRSP) targeting total returns.
BCE trades near $54 at the time of writing compared to $65 earlier this year and as high as $74 in 2022.
The decline is partly due to weakness in the media business. BCE owns a television network, specialty channels, radio stations, and interests in pro sports teams. The digital platforms for the media group are performing well, but the radio and TV assets are struggling with a decline in ad revenue. Customers are either trimming marketing budgets or shifting ad spending to other alternatives.
Interest rate hikes are likely responsible for the bulk of the pullback in BCE’s share price. The company uses debt as part of its funding strategy for its capital projects. BCE spent about $5 billion in 2022, including the expansion of its 5G network and the continued rollout of the fibre-to-the-premises program. These initiatives should drive revenue growth while helping to protect BCE’s position in the market. Higher borrowing costs, however, can hurt profits and reduce cash that is available for distributions.
Another impact of rate hikes is the competition for investor funds from no-risk alternatives. BCE is popular with retirees and other investors who seek reliable, high-yield passive income. The sharp increase in interest rates in the past 18 months has also driven up rates available from Guaranteed Investment Certificates (GICs). At the time of writing, investors can get insured non-cashable GICs with rates above 5% for terms of one to five years.
Dividend stocks carry capital risk, so investors tend to demand a higher yield than the no-risk alternative. One theory is that the share prices of top TSX dividend stocks, such as BCE, are falling to the point where the yield increases to a point that offers an attractive premium over GICs.
BCE raised the dividend by at least 5% in each of the past 15 years. At the time of writing, investors can get a 7.1% dividend yield.
BCE generated solid results through the first nine months of this year and is on track to hit its 2023 guidance. Operating revenue for the third quarter of 2023 came in slightly higher than the same period last year, supported by strength in the core mobile and internet businesses. Free cash flow increased 17%. Adjusted earnings per share dipped 8%, reflecting the impact of higher borrowing costs.
Is BCE stock good to buy today?
Bargain hunters started buying BCE stock in recent weeks, and that trend could continue. The Bank of Canada might be done raising rates, and some economists predict steep rate cuts in 2024 to avoid a hard landing for the economy. If that turns out to be the case, BCE and other top dividend stocks could soar next year.
Near-term volatility should be expected, but BCE still looks cheap and pays an attractive dividend that should continue to grow. If you have some cash to put to work, this stock deserves to be on your radar.
The post Should You Buy BCE Stock for its 7% Dividend Yield? appeared first on The Motley Fool Canada.
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.