Do the Huge Dividends of Windstream and Frontier Communications Interest You?

That 9.9% dividend yield is mighty tempting.

Jul 7, 2014 at 7:16PM

Source: Flickr user Chas Redmond.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some telecom companies to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Telecom Services ETF (NYSEMKT:VOX) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of telecom companies simultaneously.

Why telecom, and why this ETF?
The telecom sector is huge -- telecom operators rang up about $2 trillion in revenue worldwide last year, and the industry has the potential to get even bigger. Consumers are demanding more and better connectivity, which means new technologies and new equipment are needed. The mobile realm in particular is growing briskly, with niches such as mobile payments and security showing particular promise, while smartphones are spreading like wildfire in emerging markets.

ETFs often sport lower expense ratios than their mutual fund cousins, and the Vanguard Telecom Services ETF has an exceptionally low one of 0.14%. It also recently yielded about 3.7%. It has outperformed the world market over the past five years but lagged it a bit over the past three.

A closer look at some components
On your own you might not have selected Windstream Holdings Inc (NASDAQ:WIN) or Frontier Communications Corp (NASDAQ:FTR) as telecom companies for your portfolio, but this ETF includes them among its 31 holdings.

With a dividend yield of 9.9%, Windstream draws a lot of interest, as does Frontier, with its 7% payout. Not all big dividends are worthy of your dollars, though, as some are tied to shaky companies. Both of these companies have their share of critics: More than 13% of Windstream's shares were sold short as of late May, while more than 16% of Frontier's shares were sold short. But Windstream's stock is up some 41% over the past year and has averaged gains of 14% over the past five. Frontier's five-year average is just 6.7%, but it's up more than 60% over the past year.

What's going on with these companies? Well, both are telecom companies that have focused on the rural market and landlines in the past. That's not a promising field as more people switch to wireless communications, so the companies are working hard to develop wireless offerings for consumers and businesses -- and their strategies are bearing some fruit.

Frontier's last earnings report featured record net broadband additions, with market share growing in 91% of markets. It's still losing customers, but at a slower rate due to retention efforts. The company bought AT&T's Connecticut operations last year, boosting its customer base and extending its geographical reach. Windstream, meanwhile, is offering data centers and cloud-computing services, with its chief executive officer noting in May that its last quarter was "our best quarter ever in terms of enterprise sales." Its free cash flow is growing, but so is its share count, which shrinks EPS -- and debt is growing, too.

There are risks with both companies. Their fat dividends, for example, may end up trimmed if business slows. And Frontier's last earnings report reflects just that -- a pullback in both residential and business revenue, along with shrinking profits and net margins. Both companies, especially Windstream, also carry significant debt, which can constrain them and threaten dividends.

On the other hand, successful strategy shifts don't happen overnight. There's reason to be hopeful about the prospects for both companies, but they do present more risk than many other alternatives. Of course, their dividends can offset some of that risk -- as long as they last. (Both companies sport worrisome payout ratios.) If you buy into either, you should keep a close eye on its progress.

The big picture
It makes sense to consider adding some telecom companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.

Seeking less risky dividends? Look here.
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's why our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Windstream. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers