3 Reasons Why CenturyLink Is a Top Dividend Stock

Source: CenturyLink.

Dividend investors love big yields, but they also rely on companies that won't slash their payouts when times get tough. By that measure, one might conclude that no self-respecting dividend investor would want anything to do with CenturyLink (LUMN -6.20%), which reduced its dividend by 25% in early 2013. Yet even after the cut, CenturyLink still pays a healthy yield of 5.5%. And more importantly, what the company is doing with the money it saved from cutting its payout is arguably even more valuable to long-term shareholders than receiving more dividend income would have been.

CenturyLink has joined several other telecom stocks, including Frontier Communications (FTR) and Windstream Holdings (WINMQ), in paying impressive dividend yields. But CenturyLink isn't simply clinging to a dying segment of the industry -- it is instead looking for new ways to grow. Let's look at three reasons CenturyLink still deserves to rank among the top dividend stocks in the market.

1. CenturyLink's dividend cut was for all the right reasons.
Across the telecom industry, investors have learned the hard way that dividend cuts are almost always bad. Frontier, for instance, has cut its dividend not once but twice in recent years, now paying only 40% of what it paid five years ago. Windstream has been rewarded for not cutting its dividend, but its proposed corporate restructuring will likely lead to major changes in the way its investors get paid.

When CenturyLink slashed its payout early last year, investors initially panicked, sending the stock down more than 20%. But in the aftermath of the move, investors have discovered that CenturyLink has made progress it otherwise wouldn't have made. By diverting money away from dividends toward share repurchases, CenturyLink actually took advantage of dividend investors' panic, picking up shares on the cheap and cutting its share count substantially. That gives CenturyLink a competitive advantage in earnings growth over Frontier and Windstream, as lower share counts mean higher earnings per share for those who held onto their stakes in the company.

2. CenturyLink has done well with its product mix.
The biggest challenge CenturyLink faces, along with Frontier and Windstream, is how to manage the inevitable decline in their legacy landline businesses while still making progress in higher-margin, cutting-edge services. Even though CenturyLink hasn't found a solution to declines in its landline revenue, it nevertheless has done a better job than its peers in stemming the tide of customers away from its obsolescent offerings.

Source: CenturyLink.

Moreover, strength in CenturyLink's newer offerings has helped keep overall operating revenue on the rise. Specifically, CenturyLink's Prism TV video service picked up 16,000 customers during the second quarter, weighing in at a total of 215,000. Moreover, CenturyLink has managed to retain substantial pricing power for its service, and overall, that helped CenturyLink's broadband, video, and wireless sales climb by 5% and represent more than half of the company's total sales. The more that CenturyLink can stop relying on its legacy assets at all, the more likely it'll be to weather the long-term storm and come out stronger on the other side.

3. International growth could give CenturyLink a key edge over its competition.
Late last month, CenturyLink announced that it would make its global managed hosting services available in China, expanding the international footprint of its hybrid cloud and IT infrastructure services. Even before the move, CenturyLink had almost five dozen data centers across the globe, with five in Asia helping to give the company a presence around the world that distinguishes it from its domestic-focused rivals.

Source: CenturyLink.

Indeed, CenturyLink's efforts to widen its offerings in the cloud-computing show just how dedicated the company is to going beyond traditional telecom services. By identifying an important trend in information technology, CenturyLink hopes to catapult itself into an international growth engine that could make it easier for the company to raise dividends long into the future.

CenturyLink still has a long way to go before it can declare victory over Windstream, Frontier, and other smaller rivals. For now, though, CenturyLink is doing everything it should to cement its place as an attractive stock for dividend investors.