2 Telecom Dividends to Buy and 1 to Avoid

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Finding a telecommunications company that pays a healthy dividend isn't that difficult. Finding a telecom stock that will continue to grow that dividend and provide you the chance for share appreciation as well … much tougher.

Many telecom companies generate huge cash flows and lure investors to buy into their highly debt-levered business by paying out handsome dividends that dwarf other sectors -- but not all are created equally. Here are two telecom dividends you can trust and one you might be better off avoiding.

AT&T (NYSE: T  ) -- Trust it
Before you roll your eyes and give me the old "Thanks, Captain Obvious" speech, you should understand this: With the exception of an odd blip in 2003, AT&T has raised its dividend every year for the past 25 years.

Aside from being potentially the safest bet in all of telecom, it holds a few distinct advantages over rival Verizon (NYSE: VZ  ) . Fundamentally, AT&T trades closer to its book value, has produced $4 billion more in cash flow from operations in the trailing-12 months, and boasts a lower forward P/E than Verizon (12.4 to 14.2). Most importantly, AT&T's quarterly distribution has grown by 223% since 1986, while Verizon's 150% growth in that period has been more erratic.

CenturyLink (NYSE: CTL  ) -- Trust it
CenturyLink has been more like a kid in the candy store recently, snatching up Qwest Communications last year and successfully bidding for SAVVIS (Nasdaq: SVVS  ) two weeks ago. The only question mark surrounding CenturyLink will be whether or not any integration issues arise while working two new companies into the mix.

Shareholders, on the other hand, have received a hefty reward, to the tune of a tenfold increase in its quarterly distribution within the past four years. CenturyLink currently yields more than 7%, one of the highest yields in the sector, and thanks to its recent purchases looks to produce more than $17 billion in revenue in 2012 from just $7 billion in 2010. On a book value basis, CenturyLink is still inexpensive, so there's still plenty of room for its stock and dividend to move higher.

Frontier Communications (NYSE: FTR  ) -- Avoid it
I know I'm going against the grain here, especially with Frontier sporting an 8.9% dividend yield. But the goal is to find healthy dividend growth along with the potential for stock appreciation, and Frontier may fail to deliver on both fronts.

Frontier makes its business in the brick-and-mortar section of the telecom industry: landlines. The landline business offers a relatively stable cash flow which helps pump out that alluring dividend, but growth prospects are limited as is evidenced by the 4% revenue decline analysts predict next year. Even more disturbing, Frontier's quarterly dividend fell from $0.25 to $0.1875 last year and could fall further if its business remains stagnant. It's a company whose questionable growth prospects outweigh an otherwise high dividend yield.

In growth we trust
Dividend hunting involves more than just looking at a simple yield. Taking into account a company's dividend growth as well as future growth prospects can lead to more stable and potentially more profitable investments.

Which telecom company would be your top dividend pick? Share your thoughts in the comments section below and consider adding AT&T, CenturyLink and Frontier Communications, as well as your own personalized list of companies to My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. AT&T is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that puts investors first.

Read/Post Comments (8) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 09, 2011, at 8:06 PM, techpatriot wrote:

    I have an issue with part of our commentary. Notice I am calling it commentary rather than analysis, as that is what it is.

    For what it's worth, I agree with you on a few points.

    1) The telecom industry is a cash cow that should only get fatter.

    2) AT&T is a best of breed stock from many different angles, especially with the purchase of T mobile.

    3) CenturyLink is another solid investment, although not on par with AT&T.

    4) Frontier is not in the same league as AT&T and Centurylink when it comes to growth.

    Where I have issue is your characterization of Frontier as a stock to "avoid". If you looked into the reason for the dividend decline, you would have seen that it was due to the purchase of a massive amount of landlines from Verizon, a good deal on both parties parts, and not due simple revenue decline.

    I also go against the grain on the prevailing sentiment against rural landlines.

    While landline usage is declining, in rural areas where Frontier operates it remains quite strong. Also, as an alternative to cable, Frontier will be rolling out higher margin internet and content streaming to these rural customers. You are not going to go wireless in rural areas for content delivery. Both coverage and bandwidth make that extremely unlike for several years to come.

    If you want an alternative to the rip-off that cable companies have become, who do you turn to? DSL from your reliable phone provider, with Netflix, Itunes and Hulu to start with, that's who.

    Add in a decent digital TV antenna and who needs the cable company?

    I feel good about Frontier's business model, it's customer base, it's long term strategy and it's ability to monetize the Verizon purchase going forward.

    I will agree that it does not offer the growth that AT&T and CenturyLink should, but remember it's juicier dividend should make up for some of that.

    A boring but high yielding utility stock? Perhaps.

    Avoid it altogether? Hardly!

  • Report this Comment On May 09, 2011, at 8:10 PM, Matt84 wrote:

    I own AT&T.

  • Report this Comment On May 09, 2011, at 8:32 PM, awsure wrote:

    I personally hate at&t with every fiber of my being. I also own a hefty chuck of their stock.

  • Report this Comment On May 10, 2011, at 6:57 PM, techpatriot wrote:

    Looks like this article is now mostly irrelevant - and it may be time to buy Frontier......

    At least on dips since it's up over 10% this month...

    Other investors and Fools seem to agree...

  • Report this Comment On May 13, 2011, at 7:39 PM, CRACKTACTOR wrote:

    ATT service is pathetic and the only reason people aren't flocking to Verizon is because they are probably still tied to multi year contracts. The question is, will ATT rise to the standard of top notch service provided by T-Mobil, or bring down the latter's quality, thus handing another crowd of disgruntled customers over to VZ.

    Personally, I'm sticking with CTL and Deutch/T'com, along with dividend champ VZ.

  • Report this Comment On May 14, 2011, at 11:07 AM, snapcap wrote:

    I own T for the dividend. I currently have Frontier as my landline provider after they bought the Verizon landlines in my area. My cell is AT&T. I have also had T-Mobile cell service. After having used the services of each of these companies, I still prefer AT&T to any of the others. I get better customer service and better call coverage on my cell.

  • Report this Comment On May 14, 2011, at 9:59 PM, stockmover wrote:

    I personally have positions in T, VZ and CTL . I used to also have a position in FTR but chose to sell it because I was over-weighted in telecom stocks so I needed reduce my telecom exposure.

    I never looked back !

  • Report this Comment On May 15, 2011, at 4:26 PM, Pianoman1018 wrote:

    I've had "T" for a couple of years and am happy with it but for really serious dividends I was wondering about picking up some Cellcom Israel (CEL) or Telcom Corp of New Zealand (NZT). Too risky?

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