8.6% Yield? Here’s the Dividend Trap to Avoid in February

An 8.6% yield can look like a free lunch in February. It can also be a warning label. When you judge a dividend stock, ignore the hype and follow the cash. Ask three things: can it fund the payout after necessary spending, can it refinance debt without pain, and can it defend its pricing power? A dividend that depends on borrowing or constant share issuance turns “income” into a slow leak. The goal is not the biggest yield. The goal is the most durable yield. So, is this dividend stock worth it?

T

TELUS (TSX:T) sits in the spotlight because its yield rose as its share price sagged. It operates wireless and internet networks across Canada and sells TV and business connectivity. It also owns TELUS Health and a digital services arm that supports customer experience and IT work. That mix sounds defensive, but investors have treated it like a stressed income name lately, which is why the yield now screens near 8.6%.

The past year brought a tone change from management. In December 2025, TELUS said it intends to keep paying the dividend at its current nominal level. However, it would pause dividend growth until the share price and yield better reflect the company’s prospects. Many telecom buyers count on a steady pattern of increases. A pause does not equal a cut, yet it signals the board wants breathing room while it rebuilds cash flexibility.

TELUS also pushed a big long-term investment message. In May 2025, it planned to invest more than $70 billion in Canada over the next five years, including two artificial intelligence (AI) data centres and continued network expansion, with emphasis on rural coverage. That can support long-run competitiveness and customer growth. It also keeps capital spending front and centre, which matters because telecom dividends compete with towers, fibre, and spectrum for every dollar.

Into earnings

Recent earnings show why the dividend debate feels so intense. In the third quarter of 2025, TELUS reported consolidated operating revenues and other income of about $5.1 billion, flat year over year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose about 1% to roughly $1.9 billion. Free cash flow increased about 8% to around $611 million, helped by lower capital expenditures in the quarter. Adjusted earnings per share (EPS) came in at $0.24, down from $0.28 a year earlier.

The dividend stayed intact, but coverage looks tight. TELUS declared a quarterly dividend of $0.4184 per share payable Jan. 2, 2026, up 4% from a year earlier. Yet that higher dividend comes with a payout ratio of about 210%, which signals weak earnings coverage right now. TELUS can argue that cash flow tells the real story, and cash flow did improve in the third quarter. Still, a high yield paired with thin coverage forces investors to watch leverage and refinancing risk closely.

Management’s plan aims straight at that pressure. TELUS set expectations of about $2.15 billion of free cash flow in 2025 and a preliminary target of about $2.4 billion in 2026, alongside a 2026 capital expenditure target of around $2.3 billion. If it hits those numbers and keeps capital intensity trending down, the dividend becomes easier to defend. If it misses, the market will keep demanding trade-offs because it cannot get both heavy investment and high payouts forever.

Bottom line

So, is it a buy, or is it the dividend trap to avoid this February? It could be a buy for a patient investor who wants a high starting yield and believes free cash flow improves enough to support the payout without financial gymnastics. And I mean, here’s what that dividend stock could bring in from $7,000 alone.

COMPANYRECENT PRICENUMBER OF SHARESANNUAL DIVIDENDANNUAL TOTAL PAYOUTFREQUENCYTOTAL INVESTMENTT$19.34362$1.67$604.54Quarterly$6,998. 08

However, it could be a pass for anyone who needs certainty, because telecom competition and large capital budgets can turn “stable” into “stretched” quickly. The trap is not owning TELUS. The trap is buying the yield and ignoring what it must prove next this year. Next earnings land on Feb. 12, 2026, and the market will listen for free cash flow, leverage, and any hint of a dividend-growth restart.

The post 8.6% Yield? Here’s the Dividend Trap to Avoid in February appeared first on The Motley Fool Canada.

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More reading

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• Forget Telus! 1 Cheaper Dividend Stock With More Growth Potential
• 5 Stocks to Hold for the Next Decade
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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.