High yields can be great, but only if they are safe. The danger with investing in a stock that pays a high yield is that it might not last for long. There have been countless times in the past where a company slashed a payout because it was sustainable.
For years, Telus (TSX:T)(NYSE:TU) has been a great dividend stock to own. But lately, the stock has been struggling and the market doesn't appear to be convinced that its dividend really is safe. Shares of Telus have fallen by 5% this year and over the past five years, they're down by an incredible 35%.
Today, the yield is at 9.9%. If it were safe, it would be a steal of a deal, as it would mean you'd get roughly one-tenth of your investment back in the form of dividends. Invest $20,000, get $2,000 back each year in dividends. It sounds great, but investors haven't been taking the bait. A big reason why is that its payout ratio is well over 100%. However, on a cash-flow basis, the dividend is adequately supported, as Telus has generated more than enough free cash to cover its dividend payments. A dividend cut may not be imminent, but the market may very well be expecting one given how the stock has been performing in recent years.
Telus stock could make for an intriguing contrarian play because if Telus' margins improve and its payout ratio comes down, the stock could take off, and meanwhile, you've locked in a great dividend. There's some risk here, and this may not be the typical safe stock that dividend investors normally seek out, but there could also be a lot of potential upside if you're willing to take a chance on Telus.
