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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.