Big Dividends, Big Risk?

Last week, Motley Fool Income Investor James Early told me about one oil stock that could produce big returns. In this week's installment, James shares his thoughts on two of the country's biggest dividend payers and explains why investors shouldn't focus too much on big yields.

Mac Greer: OK, James. The three highest-yielding stocks in the S&P 500 are rural telecoms -- Frontier Communications (NYSE: FTR  ) , Windstream (NYSE: WIN  ) , and CenturyLink (NYSE: CTL  ) .  Why?

James Early: Rural telecom is a declining business, kept alive partially from surcharges paid by city slickers like you and me. Yet these companies have paid-for infrastructure and cash flow from existing -- if fewer -- customers. Because they generate cash but don't grow (barring acquisition), much of your return comes as a dividend.

Greer: OK, James. Let's talk about a couple of those telecoms. Frontier Communications currently pays a dividend of 9.87%.  Windstream pays a dividend of 8.83%. Which do you like better?

Early: I'd avoid Frontier. Frontier itself was a solid $2.2 billion rural telecom that spent $8.8 billion to buy Verizon's (NYSE: VZ  ) rural lines. This tripled its lines, but Verizon has a history of unloading its junk onto unsuspecting buyers: Hawaiian Telcom had to file for bankruptcy shortly after the Carlyle Group bought it from Verizon, and rural telecom Fairpoint (NYSE: FRP  ) nearly went bankrupt trying to digest Verizon's northeastern rural lines, which it bought in 2008. Come to find out, the lines Verizon sold Frontier have lower margins, faster customer loss, and lower penetration rates than Frontier's lines. I'm not terribly bullish on U.S. rural telecom long term, but if you want the yield, I'd go with Windstream.

Greer: My final and only tangentially related question. I'm a satisfied Verizon customer, but I want to ditch my Blackberry. Do I go with one of the new Droid phones (and keep Verizon) or do I wait on the iPhone and the long-mentioned Verizon/Apple (Nasdaq: AAPL  ) partnership?

Early: You're opening a can of worms and you know it. Rumor has it that Apple will debut its Verizon iPhone in January 2011, so if you're OK with that, it comes down to phone functionality, and whether you want a working antenna. I'm a Mac fan in general, but Droids have been taking market share and are probably going to be better phones hardware-wise, though Apple will still kill on apps.

Want more? James thinks an Apple dividend could produce big returns for shareholders.

And Motley Fool Hidden Gems analyst Jeremy Meyers kicks the tires on some telecoms and says dividends aren't enough.

Apple is a Stock Advisor selection. Neither Mac nor James owns any of the stocks discussed. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.   


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  • Report this Comment On August 24, 2010, at 9:03 AM, Stocklovr wrote:

    "Verizon has a history of unloading its junk onto unsuspecting buyers..." - really? I don't think it's fair to call previously successful businesses "unsuspecting buyers". In all cases, they went into the deal like every other acquirer. If they didn't think it was a good deal or they didn't do the proper due dilligence, then they should not have made the deal. That certainly is not Verizon's fault!

    These spin-offs ALL required federal and state regulatory approval but nobody says that they dropped the ball either.

    Regarding the Frontier deal - Verizon setup essentially a fully functional spin off business - staffed with experienced Verizon employees and running essentially in tandem with it's own operations - until the actual split. Those employees now work for Frontier and the operations are still fully functional. If Frontier can't make that business model work, then that too, is not Verizon's fault.

    In short, I think it's a cheap shot to say that Verizon was "unloading its junk onto unsuspecting buyers".

    Slvr - Long VZ

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