The Dow Jones Industrials (^DJI 0.69%) have long been known as a strong place to loko for dividend-paying stocks. But at least so far in 2014, high-yield dividend favorites from outside the Dow have put the venerable average to shame, with double-digit total returns far outpacing even the Dow's recent run to all-time record highs. Let's take a look at how Windstream (WINMQ), Frontier Communications (FTR), and CenturyLink (LUMN) have managed to give dividend investors such strong returns this year.
Total Return Price data by YCharts
Why dividend investors love rural telecoms
The telecommunications industry has been a dividend powerhouse for investors for a long time. In the past, telecom companies had their primary businesses regulated almost like utilities, and that led to slow growth but dependable cash flow that conservative investors loved.
As wireless networks took precedence over landlines, some of the largest players in the industry gravitated away from the slow-growth side of the business, but rural telecoms like Windstream, Frontier, and CenturyLink have continued to get large parts of their overall revenue from antiquated services. They've tried to get customers to switch to more modern, higher-margin services, but they also benefit as long as customers hold onto their landlines and keep paying monthly charges for their service. Those dependable cash flows help support yields of 6% for CenturyLink, 7% for Frontier, and almost 10% for Windstream.
Source: Flickr user Chas Redmond.
Can they grow too?
The primary concern that investors have about rural telecoms is that they don't trust their high dividend yields. Frontier has slashed its dividend twice in the past several years, and it now pays just 40% of the quarterly dividend it paid four years ago. CenturyLink has also reduced its payout, making a 25% dividend cut last year in order to shore up cash flow and use it for more productive purposes. Investors fear that further cuts could be in store for the companies, although Windstream has thus far bucked the trend and kept its payout constant.
But rural telecoms are also taking steps to try to bolster growth in their business models. Frontier has done a good job of encouraging customers to add broadband Internet service to their overall account packages, and even though it's still suffering losses on a customer-count basis, its work toward retaining more of its customer base are bearing fruit, as market share is increasing in more than 90% of its markets. Similarly, Windstream is working at bolstering its presence in the enterprise IT market, offering services like cloud computing and data-center support that encourage corporate customers to stick with Windstream rather than defecting to rival telecoms. CenturyLink has added broadband customers as well, and video offerings have also proven to be a good way to retain customers.
With financing costs at very low levels because of low interest rates, debt-heavy rural telecom stocks essentially make the most of cheap leverage and have therefore been able to crush the Dow Jones Industrials relatively easily so far in 2014. If financing costs start to rise, the risk-reward trade-off for rural telecoms won't necessarily look quite as attractive. But as long as they continue to see progress in their respective growth efforts, rural telecoms will have some big advantages that many other stocks lack.
