This high dividend stock’s payout is rising

Investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price) as stock markets continue to recover. Companies are responding by doing their best to maintain, or even increase, their dividend payments.

That’s good news for investors, because dividends are more dependable than capital gains as a source of income. A couple of decades ago, you could assume that dividends would contribute up to a third of your long-term investment returns, without even considering the tax-cutting effects of the dividend tax credit.

Earlier in this decade, dividend yields were generally too low to provide a third of investment returns. But now that yields have moved up and interest rates have moved down, it’s realistic to assume they will once again contribute as much as a third of your total return.

Look at the complete picture when buying high dividend stocks

Of course, high dividend yields are a big plus, but you should avoid buying stocks for this reason alone. That’s because the high dividend yield could be the result of a drop in the share price.

If the share price remains low, a high dividend could be an indication of much deeper problems. It may also mean that insiders are selling the stock due to bad news that is not yet widely known. In cases like this, it may be only a matter of time before the company cuts, or even halts, its dividend payments.

That’s why you have to look at a stock’s dividend yield in context with other factors, such as its profitability and market position.

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High dividend stocks: Telus aims for wireless growth

In a recent Successful Investor hotline, we updated our buy/sell/hold advice on one of the high dividend stocks we’ve analyzed for some time, Telus Corp. (symbols T and T.A on Toronto). Telus is Canada’s second-largest telephone company after BCE Inc.

The company has raised its quarterly twice in the past year. The new annual rate of $2.10 a share, up 5.0% from $2.00, yields 4.5% (4.7% for the non-voting “A” shares).

Telus gets 51% of its earnings from its 6.9 million wireless subscribers across Canada. The remaining 49% of the high dividend stock’s earnings come from its traditional phone business, which has 3.8 million customers in B.C., Alberta and eastern Quebec. The company also has 1.2 million Internet subscribers.

Strong growth in smartphones

Telus’ network upgrades have been costly, but they have let the company sell a wider variety of smartphones, including Apple’s hugely popular iPhone.

In the three months ended September 30, 2010, Telus added 153,000 new wireless subscribers, net of cancellations. That’s a gain of 22.4% from a year earlier. Smartphones, which the company typically sells under long-term contracts, now account for 28% of its wireless subscribers, up from 18%.

New services, large retail network help Telus compete

Telus bought the 113-store Black’s Photo chain in 2009. That gave it about 1,000 stores through which to sell its wireless phones, and added to its presence in Ontario. As well, it has now attracted 266,000 subscribers to its Optik TV television service, which it delivers over phone lines in nine cities in B.C. and Alberta.

Telus is facing rising competition in the most profitable parts of its business, including wireless. We’ll continue to monitor Telus’ growth strategy, and its plan for dealing with new competitors, and update our buy/sell/hold advice as necessary in The Successful Investor. What’s more, you can get one month free when you subscribe today. Click here to learn how.

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