In some respects, BCE stands out as the quintessential dividend stock. It holds a prominent position as a national institution, having consistently paid a dividend for the past 25 years. This stability and longevity have made it a notable choice for investors. However, with its shares experiencing a recent freefall, doubts have begun to surface among investors regarding the safety of dividend stocks like BCE for their retirement savings. Specifically, the question arises as to whether retirees in need of a steady income source should opt for dividend stocks instead of long-term government bonds. (For a comprehensive analysis, we will also consider 91-day T-bills as a third option.)
Unraveling the Safety of BCE as a Dividend Stock
Dividend Stability and Longevity
BCE has been a reliable dividend payer for an extensive period. Its consistent payout over the past 25 years showcases its financial strength and commitment to shareholders. This stability provides a sense of security for investors, especially those seeking a steady income stream. The fact that it has withstood the test of time demonstrates its ability to navigate various economic conditions and emerge stronger.Moreover, as a national institution, BCE enjoys a certain level of credibility and stability in the market. Its established presence and reputation give investors confidence in its ability to continue paying dividends in the future. This long-term perspective is crucial for retirees who rely on their investments for a steady income during their golden years.Market Performance and Comparison
Despite the challenging start in 1999, with the bursting of the dot-com bubble and subsequent economic downturns, Chart 1 clearly shows that the stock portfolio consisting of BCE, a Big Five bank (TD-T), and an energy utility (Enbridge ENB-T) produced significantly more annual income than a bond portfolio after 2004. The bond portfolio, which consisted of $50,000 in long-term Canada bonds with a purchase yield of over 6 per cent locked in for 25 years, failed to keep up with the stock portfolio in terms of income generation.Chart 2 also highlights the difference in market value over time. The market value of the stock portfolio is far greater than that of the bond portfolio, indicating the potential for capital appreciation in stocks. This is an important aspect to consider for investors looking to grow their wealth over the long term.Investment Horizons and Choices
For investors with a very short investment horizon and a low tolerance for capital loss, bonds or GICs (Guaranteed Investment Certificates) or even T-bills may be a more suitable option. By choosing these fixed-income instruments, investors can ensure the preservation of their capital without the volatility associated with stocks.On the other hand, for most retirees under 70 with an investment horizon of 10 to 20 years, a significant holding in the shares of major companies with a steady revenue stream and a proven dividend history like BCE can be a prudent choice. These companies have the ability to generate consistent cash flows and provide a reliable source of income.For Generation X or Y investors, the decision becomes more complex. While virtually all of their savings should go into stocks, the question of whether it should be dividend stocks or growth stocks requires a more in-depth analysis. Each option has its own set of advantages and risks, and investors need to carefully consider their investment goals and risk tolerance.In conclusion, while historical results do not guarantee future performance, the case of BCE as a dividend stock presents an interesting perspective. Investors need to carefully evaluate their investment horizons and risk preferences when deciding whether to invest in dividend stocks like BCE or opt for other investment options. By doing so, they can make informed decisions that align with their financial goals.