High yields and low stock prices often go hand in hand. That's just the mathematical nature of dividend yield calculations -- cheap shares and generous payouts add up to juicy yields. But some of these high-yield shares are cheap for good reason, and extreme yields are often red flags marking a troubled business and a bad investment.
One way to avoid the worst high-yield offenders is to check with the experts, who can point you to high-quality businesses that also love returning cash to their shareholders. So we rounded up a few of your fellow investors here at The Motley Fool and asked for some advice.
A leader in the wireless future
Keith Noonan (AT&T): With its hefty dividend and underappreciated growth prospects, AT&T is an undervalued income play that's worth holding for the long term. It's worth looking at why the company's stock can currently be had for cheap.
On the wireless service side of things, value-priced competitors including Sprint and T-Mobile have caught up to AT&T's 4G network -- reducing the appeal of "premium" service. The result is a pricing war that's causing AT&T to lose subscribers and take margin hits to offer more competitive service, but the company's advantage in wireless should re-emerge with the expansion of 5G networks. The rollout will be a capital-intensive endeavor, but 5G will be at the center of the Internet of Things and other next-gen communication technologies, so the opportunity extends far beyond mobile service.
The company's pending acquisition of Time Warner, which seems to be on track to be approved, is another reason to like the stock. As tech companies are scrambling to build their content offerings and bolster their respective ecosystems, AT&T has made a promising play for one of the world's top entertainment conglomerates. If the deal goes through, AT&T will be in position to offer wireless television packages that competitors will be hard pressed to match and also make Time Warner's advertising business much more profitable, thanks to the advantages of digital ad targeting over cable distribution.
With AT&T's roughly 5.4% dividend yield and a 33-year history of delivering annual payout increases, you won't find many companies offering a better returned income component in the technology and telecom sectors. Its forward price-to-earnings multiple of roughly 12 looks like a bargain in today's frothy market.
Riding Verizon's momentum to market-beating gains
Steve Symington (Verizon Communications): Verizon endured a rough first half of 2017, after increasing competition led to its first-ever postpaid wireless subscriber decline to kick off the new fiscal year. But the telecommunications juggernaut quickly fixed the situation by launching new unlimited-data plans the following quarter. Just last week, Verizon followed up by demonstrating continued wireless momentum in adding 603,000 retail postpaid accounts in Q3, and maintaining healthy retail postpaid churn of 0.75%.
At the same time, Verizon's service revenue declined 5.1% year over year. But its trends to that end are improving; service revenue grew on a sequential basis last quarter for the first time in three years, and Verizon expects to exit 2017 with a year-over-year service revenue decline of under 4%. Meanwhile, last month, Verizon boosted its quarterly dividend for the 11th straight year, bringing its annual yield at today's prices to roughly 4.8%.
With shares still down around 9% year to date and trading at just 12.7 times forward earnings, Verizon is an enticing bet for investors willing to buy stock now and watch the business continue to improve.
Bet on the better half of the old Windstream
Anders Bylund (Uniti Group): The former networking infrastructure arm of regional telecom Windstream (NASDAQ:WIN) sports a current dividend yield of 16%. Generous sharing of the real estate investment trust's cash flows is one half of the yield equation. On the other side, Uniti's share prices have fallen 47% lower over the past 52 weeks, thus driving the effective yield that much higher.
The stock is suffering under terrible results from Windstream, and many investors fear that Uniti's largest client may go bankrupt soon. These fears are not unreasonable -- Windstream recently canceled its own high-yield dividend policy altogether, in an effort to shore up its unstable balance sheet and negative free cash flows. Windstream may indeed make an exit, stage left, at any time.
Yet I am confident enough in Uniti's value to own that stock, even as I'm predicting a dire end to the company's largest customer.
I'm convinced that Windstream spun out its most valuable asset to create Uniti. The long-haul network manages 4.8 million strand miles of network fiber and 468 wireless towers, boasts a far stronger balance sheet, generates cash while Windstream is burning it, and is actively looking to distance itself from Windstream.
Uniti started its young standalone life in 2015 with just one client, and you already know who. Since then, a campaign of smaller network buyouts and an active client-hunting project has expanded the customer list to 16,000 names. That list includes high-quality clients such as the U.S. Department of Defense, several nationwide telecoms not named Windstream, and a few cable TV broadcasters.
Furthermore, the long-term lease agreement between Windstream and Uniti was structured to preserve the contract terms in the event of a bankruptcy. If worse comes to worst, Windstream's bankruptcy would cause some temporary uncertainty and delayed payments, but whoever picks up the fallen company's assets for pennies on the dollar will end up honoring the terms of Windstream's original agreement. I'm no lawyer, but there's legal precedent for so-called favorable lease terms surviving Chapter 11 filings.
Maybe I'm underestimating the risks here, but Uniti remains a useful and promising part of my retirement portfolio. At these bargain-bin prices, maybe you should start a Uniti position, too.
Anders Bylund owns shares of T-Mobile US and Uniti Group. Keith Noonan has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.