Yahoo Finance Better Buy for TFSA Passive Income: Telus Stock or TD Bank?
Written by Puja Tayal at The Motley Fool Canada
In Canada, telecom and bank sectors house some of the best Dividend Aristocrats, which pay dividends and even grow them. Of Telus (TSX:T) and TD Bank (TSX:TD), which is a better investment today? Telus and TD are among the top five in their respective sectors and have long histories of paying dividends.
How to choose a stock for TFSA passive income?
When faced with a choice, consider four factors to determine which stock to buy:
Cash flow forecast
Dividend-payout ratio
Dividend growth
Dividend yield
Cash flow forecast: Telus vs. TD Bank
Free cash flow (FCF) is the amount company has after investing in the business. The management uses FCF to pay dividends to shareholders. If the company fails to earn the planned FCF, it has less money to invest in the business and repay debt. If FCF remains weak for a longer period, the company could cut dividends to preserve cash.
Telus has accelerated its spending on 5G infrastructure in the last two years. However, it started reaping the rewards of this spending, as it reported record net additions in subscribers in the first quarter. Higher revenue increased its FCF by 29%, and the company maintained its 2023 guidance of $2 billion in FCF, hinting that it can continue growing dividends in 2023.
TD Bank pays dividends on earnings, and its earnings improved in the April 30th quarter. The bank has not provided earnings guidance amid economic uncertainty.
Dividend-payout ratio: Telus vs. TD Bank
The dividend amount a company pays from its FCF is called the dividend-payout ratio. Generally, a 60-75% ratio is considered healthy, as it shows the company has enough flexibility to continue paying dividends even when profits are weak. A 90% dividend-payout ratio shows the company is using almost all its FCF on dividend payments, which are not sustainable. One-off instances of high payout ratio are manageable, but a prolonged situation leads to dividend cuts.
Telus aims to maintain a dividend-payout ratio between 60% and 75% of FCF. Its ratio increased 89% in the first quarter as it accelerated capital spending to build PureFibre infrastructure. This capital spending is in the company’s hands. Excluding the one-off spending, the ratio was 62% within the guided range.
TD Bank aims to maintain a dividend-payout ratio in the 40-50% range. But it exceeded this ratio in the December 2022 (116.5%) and April 2023 (55.8%) quarters, as it increased provision for credit losses. This ratio could remain high for a longer term, as interest rates will likely remain high throughout the year, increasing credit risk.
Dividend growth and yield: Telus vs. TD Bank
On the above two parametres, Telus overtakes TD Bank, as the latter faces short-term headwinds. But the last 11-year data shows Telus and TD Bank have grown their dividends at a compound annual growth rate (CAGR) of 7.3% and 7.8%, respectively. Here, TD Bank has a 0.5% advantage, but it did not grow dividends in 2021, as a record-low interest rate affected its net interest margin.
There is a possibility that the bank might pause dividend growth if the U.S. economy plunges into a recession. The bank has increased its credit loss provision, as it fears higher delinquencies. TD Bank is highly sensitive to the macro environment, while Telus is not, which gives Telus another bonus point.
Stock | Share Price | Dividend per share (annual) | No. of shares (rounded off) | Annual Dividend |
Telus | $26.34 | $1.44 | 19 | $27.36 |
TD Bank | $78.26 | $3.84 | 6 | 23.04 |
When it comes to dividend stock, the price you buy the stock at impacts your passive income, because you lock in a higher dividend yield. Between the two, Telus has a higher yield (5.5%) than TD Bank (4.9%). So, if you invest $500 in each of the two stocks, you can lock in an annual dividend of $25.7 in Telus and $23 in TD Bank.
The verdict
While both stocks are good for the long term, Telus is a better buy at the current price on all accounts.
The post Better Buy for TFSA Passive Income: Telus Stock or TD Bank? appeared first on The Motley Fool Canada.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.
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