The Most Promising Dividends in Domestic Telecom Stocks

Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the domestic telecom industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  1. The current yield
  2. The dividend growth
  3. The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business' expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into domestic telecom companies
Below, I've compiled some of the major dividend-paying players in the domestic telecom industry (and a few smaller outfits), ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

Add to Watchlist

Alaska Communications Systems (Nasdaq: ALSK  )

12.2%

0.6%

NM

Add

Frontier Communications (NYSE: FTR  )

10.5%

(3.6%)

469%

Add

Consolidated Communications (Nasdaq: CNSL  )

8.4%

5.6%

146%

Add

CenturyLink (NYSE: CTL  )

8.3%

78.3%

123%

Add

Windstream (NYSE: WIN  )

7.8%

(5.9%)

179%

Add

AT&T (NYSE: T  )

5.9%

5.4%

50%

Add

Verizon

5.4%

3.9%

102%

Add

BCE

5.3%

8.7%

69%

Add

Atlantic Tele-Network (Nasdaq: ATNI  )

2.7%

12.4%

85%

Add

Shenandoah Telecommunications

2.6%

10.4%

61%

Add

Source: Motley Fool CAPS.
NM = Not meaningful because of negative earnings.

If you focus on dividend yield alone, you might end up with Alaska Communications and Frontier Communications, but they're not necessarily your best bets. Frontier slashed its dividend last year and has a very steep payout ratio, while Alaska Communications has no payout ratio at all after posting recent net losses.

Instead, let's focus on the dividend growth rate first, where CenturyLink leads the way. However, its growth rate is so steep that it will be hard to maintain for long. And the fact that its payout ratio exceeds 100% is also a red flag.

You may also notice that some notable players in the industry, such as Cincinnati Bell, aren't on the list. That's because smaller, fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders.

Just right
As I see it, among the companies above, AT&T offers the best combination of dividend traits, sporting solid income now and a good chance of strong dividend growth in the future. Verizon also deserves consideration, as do its smaller cousins, Atlantic Tele-Network and Shenandoah Telecommunications.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

To get more ideas for great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."

Longtime Fool contributor Selena Maranjian owns shares of Windstream and Verizon Communications, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of AT&T. 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.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2011, at 4:23 PM, evefromNY wrote:

    Loved this article. Its clear, and educational for the beginning investor and a reminder to me to look at these other factors more closely.

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