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Are you looking for stocks that can give you passive income for years while growing it alongside inflation? Your search ends with the dividend aristocrats.
- Dividend aristocrats are established companies that have been paying regular dividends for over 50 years and growing them for several years.
- These companies are resilient to the macroeconomic environment and enjoy steady and sustainable profits and cash flows.
- Such companies do not enjoy strong growth. Thus, the stocks of these companies may not produce significant capital appreciation.
Top dividend aristocrats
The Canadian market has several dividend aristocrats in the energy, utility, and banking sectors. Among them are Enbridge, Canadian Utilities, and Toronto Dominion Bank. Holding these stocks in your passive income portfolio will earn you inflation-adjusted passive income for decades. But I am particularly bullish on a telecom dividend aristocrat for 2023.
The dividend aristocrat for 2023
BCE (TSX:BCE) is Canada’s largest telecom operator by infrastructure. It secured its position through its three-year capital acceleration program to expand its fibre and 5G infrastructure. The fifth-generation technology will set the stage for autonomous vehicles and smart cities by providing very low latency high-speed internet to millions of edge devices.
BCE’s wireless network covers ~99% of the Canadian population, and wireline covers ~75% of Canadian households. By year-end, the telecom giant will complete 80% of its midterm broadband Internet build-out to 10 million residential and business locations and 5G+ service to a 60% addressable population. Every new customer brings subscription revenue, with the potential to cross-sell and/or upgrade.
Three reasons BCE is better than other dividend aristocrats in 2023
This year, inflation skyrocketed as pandemic lockdowns and the Russia-Ukraine war disrupted global supply chains. The supply couldn’t keep up with demand pushing inflation to a 40-year high. The central bank hiked interest rates to control inflation, thereby slowing gross domestic product (GDP) growth.
Canada’s Finance Minster slashed the 2023 real GDP forecast to 0.7% but said the economy would avoid a recession. But interest rates and inflation will likely remain elevated in 2023.
BCE is resilient to inflation
According to Statistics Canada, inflation surged 6.9%, while the cost of cellular services fell 6.3% year over year in October. Despite this, BCE’s third-quarter revenue and adjusted EBITDA surged 3.2% and 1.2%, respectively.
BCE’s revenue surged due to the record net addition of subscribers. However, its adjusted EBITDA grew at a slower rate as inflation increased its operating expenses. Its wireless adjusted EBITDA grew (7.8%) at a faster rate than revenue (7.4%) due to higher value mobile phone loadings, customer base management, and acquisition cost discipline. This shows BCE’s resilience to inflation.
BCE is not materially affected by interest rate hikes
Another aspect affecting many dividend stocks is rising interest rates. Last month, Algonquin Power & Utilities stock price fell 30% as interest rate hikes increased its interest expense and forced management to reduce its guidance. But BCE is not significantly affected by interest rate hikes as 85% of its debt has a fixed interest rate. Its weighted average annual after-tax cost of debt is at a historical low of ~2.8% (below Bank of Canada’s benchmark interest rate of 4.25%).
It has $3.5 billion in liquidity and a debt leverage ratio of 3.2 times adjusted EBITDA. All these figures show that BCE can manage its debt efficiently even in a rising interest rate environment.
BCE can benefit from a growing economy
BCE’s strong balance sheet and cost discipline can offset the impact of a recession. When the economy recovers, growing business spending can increase BCE’s ad revenue. Further, only 35% of BCE’s postpaid subscribers have a 5G capable device. As the economy recovers, more subscribers will upgrade to 5G devices. Moreover, the IoT (internet of things) proliferation could drive BCE’s average revenue per user (ARPU).
Why am I bullish on this dividend aristocrat?
BCE has been growing its dividend per share at a compounded annual rate of 5%. While other dividend aristocrats like Enbridge (3%) and Canadian Utilities (3%) slowed their dividend growth during the pandemic, BCE maintained its dividend growth at 5%. For this reason, I am bullish on BCE for future passive income.