Rural telecom Windstream (NASDAQ: WIN ) is a veritable cash machine. Amid declining voice and long-distance sales, the company has become a major provider of broadband data connections, extracting 69% of its revenue from that operation. Steady subscription fees from 3.5 million consumer accounts and 650,000 business customers ensure a rock-solid revenue stream. At the other end, Windstream marshals it all into massive cash flows:
Windstream isn't shy about sharing the wealth. The 11.1% dividend yield is currently the second-richest payout in the S&P 500, trailing only Pitney Bowes (NYSE: PBI ) at 13.8%.
So this is arguably the fattest dividend in the telecom sector. But bigger isn't always better. Double-digit dividend yields are a siren call to income investors, but often a red flag as well. As it turns out, Windstream's payouts aren't exactly rock-solid.
I'll give you the bad news first: Windstream hasn't increased its dividend payouts per share since 2007. Today's towering yield is a product of sinking share prices -- not bigger dividend checks. The quarterly bill for dividend payments has jumped, though -- Windstream issued 70 million new shares to acquire data center operator PAETEC last year, boosting the share count and total dividend payments by 14%. Right now, Windstream has to dip into cash reserves to foot the dividend bill.
Hence, this is far from the safest high-yield payout in the tech and telecom spaces. Fellow rural telecom Frontier Communications (NASDAQ: FTR ) spends just 67% of its free cash flows to generate a solid 8.7% dividend yield. Hard drive maker Seagate Technology's (NASDAQ: STX ) 5.5% yield is supported by just 12% of its free cash flows. Those guys would let you sleep at night.
That being said, there's good news, too. Windstream's transformation into a high-speed data pipe for bandwidth-starved rural customers is a terrific strategy, and the PAETEC buyout shows how seriously the company is attacking high-margin corporate clients. The current cash crunch may very well be temporary, leaving room for stable or even rising dividends in years to come.
When it comes to dividend yields, you won't find many higher than Frontier Communications. While its juicy dividend is tempting, every Frontier investor has to understand that it's not a sure thing. A huge acquisition has transformed the company forever. Will the move bear fruit, or are investors destined for another disappointing dividend cut? In this premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.