1 Great Dividend I’d Buy Over Telus or BCE Stock Today

I don’t really get why so many Canadian investors remain enamoured with the big telecom stocks, namely TELUS (TSX:T) and BCE (TSX:BCE). Sure, the dividend yields look attractive on paper. But once you dig deeper, the picture becomes less appealing.

BCE’s payout looks somewhat healthier after the company cut its dividend. TELUS, meanwhile, still looks stretched to me. And remember, with telecoms, dividend sustainability is usually assessed using distributable cash flow or free cash flow rather than accounting earnings. Depreciation and amortization can distort traditional earnings metrics quite heavily in this sector.

Both companies are now talking aggressively about AI infrastructure and data centre opportunities. That sounds exciting, but these projects require enormous amounts of capital. Unlike the Magnificent Seven tech giants, Canadian telecom firms do not generate the same level of excess cash flow needed to comfortably fund that scale of expansion.

At the same time, I think the core telecom business itself may face some headwinds over the next few years. Canada recently lowered immigration targets for both temporary foreign workers and international students. That matters because population growth was a major driver behind telecom subscriber growth in the years following COVID.

More people entering the country meant more phone plans, more internet subscriptions, and more bundled services. Now, that growth tailwind may start reversing into a headwind.

If I’m looking for dividend income tied to real assets today, I’d rather own something with wider margins, lower operating complexity, and a stronger balance sheet. For me, one name that immediately comes to mind is Freehold Royalties (TSX:FRU).

The stock currently yields roughly 6.2% and pays distributions monthly. More importantly, it operates under a business model that looks very different from most energy dividend stocks on the TSX.

What does Freehold Royalties do?

Freehold Royalties operates very differently from a traditional oil and gas producer. The company does not drill wells, operate rigs, or manage pipelines. Investors still maintain exposure to oil and gas prices, but through a more asset-light business model.

Instead, it owns royalty interests tied to millions of acres of energy-producing land across Canada and the United States. Think of it almost like a landlord model for the energy sector.

When another company drills and produces oil or natural gas on land where Freehold owns the mineral rights, Freehold receives a percentage of the revenue generated from production. These arrangements are commonly known as gross overriding royalties.

That distinction matters because it removes many of the risks normally associated with energy investing. Traditional exploration and production companies constantly spend money drilling new wells, replacing depleted production, servicing debt, maintaining infrastructure, and managing environmental liabilities.

Freehold largely sidesteps those problems. Because it does not directly operate the assets, the business carries very limited operating costs and substantially lower capital expenditure requirements. That typically results in higher margins and a cleaner balance sheet compared to many smaller oil producers.

Why the dividend stands out

For most investors, the main attraction here is the monthly income. Freehold currently pays a monthly dividend of $0.09 per share, which works out to a yield of roughly 6.2% based on recent prices.

Unlike some energy companies that aggressively distribute nearly all excess cash flow during strong oil markets, Freehold generally takes a more measured approach to capital allocation. Management targets a payout ratio of roughly 60% of free cash flow.

Of course, the dividend is still tied to the broader energy market. If oil and gas prices decline materially, royalty revenue would likely fall as well. The dividend is not guaranteed, and the yield can fluctuate alongside both commodity prices and the stock itself.

Still, compared to highly leveraged producers that depend heavily on constant drilling activity to sustain production, Freehold’s royalty model tends to produce steadier cash flow with less operational volatility.

The post 1 Great Dividend I’d Buy Over Telus or BCE Stock Today appeared first on The Motley Fool Canada.

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More reading

• A Strong Canadian Dividend Stock That Looks Attractive on a Pullback
• 3 Canadian Oil Stocks That Could Thrive No Matter What OPEC Does
• Dividend Investors: Top Canadian Energy Stocks for May
• BCE vs. Telus: Which Telecom Belongs in Your TFSA?
• 1 Ideal TSX Dividend Stock Down 22% to Buy and Hold for a Lifetime 

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties and TELUS. The Motley Fool has a disclosure policy.