High Yield Stocks for Dividend Investing: Frontier Communications

Source: Leon Brooks via Public Domain Images.

For investors seeking portfolio income, times have been tough for several years, as low rates have made payouts from bonds and other traditional income investments nearly dry up. As a result, many investors have moved toward high yield dividend stocks, and Frontier Communications (FTR) is one of the top-yielding stocks in the market, paying more than 6% currently. Yet in light of Frontier's past dividend hiccups, some investors worry that they can't depend on seeing its high yield last into the future.

Frontier focuses on the rural telecom market, serving customers who don't yet have access to as many of the more technologically sophisticated telecommunications solutions that those in large cities take for granted. Yet even in the hinterlands, customers are gaining access to better telecom services, and along with peers Windstream (WINMQ) and CenturyLink (LUMN -5.15%), Frontier has had to figure out how to retain as many of its legacy customers as possible. Below, we'll take a closer look at Windstream.

Dividend stats on Frontier Communications

Source: Yahoo! Finance.

What's next for Frontier's dividend?
Rural telecom investors have gotten used to the painful adjustments that many companies in the industry have made in recent years. Frontier has jarred its investors especially hard, with a 25% dividend cut in 2010 followed by an even deeper slash of almost half leaving investors receiving just a dime per share quarterly compared to $0.25 per share before the cuts. By contrast, CenturyLink has made just a single cut of around 25%, and Windstream has thus far managed to avoid making any dividend decreases in recent years.

The good news for Frontier shareholders, though, is that the company's cash flow has been on the rise lately. When you combine the reduced outflow of cash caused by the decreased dividend with the jump in cash coming in from past deals with Verizon and other companies, Frontier pays out a much smaller portion of its free cash flow on dividends. That gives Frontier more latitude to consider potential dividend increases at some point in the future.

Source: Chas Redmond, via Wikimedia Commons.

Why Frontier's dividends might not get better
Still, Frontier has many different strategic initiatives going on that could hurt its ability to raise its future dividends. With larger telecoms seeking to sell off their slower-growth legacy landline businesses, Frontier has had no shortage of acquisition targets lately. Even as the company's proposed buyout of AT&T's Connecticut business has hit some regulatory snags, Frontier already has extensive amounts of debt on its balance sheet, and further strategic buyouts in the future will put even more pressure on Frontier's finances. In that light, expecting any recovery in Frontier's quarterly dividend payment seems overly optimistic.

One big uncertainty for Frontier is whether it will follow in the footsteps of Windstream's decision to split off its network assets into a real-estate investment trust. If it does, then Frontier investors could find themselves with shares of a high-yield REIT as well as shares of a lower-income operating company. That could also help address Frontier's debt concerns, but from a dividend investing standpoint, it's unclear what the net impact of such a move would be on yields.

With all the crosswinds buffeting the rural telecom space, Frontier Communications isn't necessarily the safest high-yield dividend stock right now. But at the very least, it appears unlikely that Frontier will cut dividends further in the near future, and the potential for yield-enhancing strategic moves in the future could make Frontier stock a palatable play for investors who aren't averse to risky dividend stocks.