Dividend chasers are bumping up against a lot of telecommunication stocks these days. Providers of wireless and legacy landline connections are out of favor, and that's pushing their chunky yields even higher.
AT&T (NYSE:T), CenturyLink (NYSE:LUMN), and Telefonica (NYSE:TEF) are all packing yields north of 5% right now. The sustainability of the big dividends is debatable over the long haul, but the near-term appreciation upside of the depressed shares and the healthy trickle of disbursements along the way make them awfully tempting. Let's go over why these three telcos are a good place for your next $3,000 investment.
There's a lot going wrong at AT&T these days. Some of its acquisitions, including DIRECTV and perhaps even its recent WarnerMedia deal, aren't paying off lately. The summer's launch of HBO Max continues to be unavailable on two of the leading streaming platforms. Even AT&T's bread-and-butter wireless business is slumping, with a lack of international travel during the COVID-19 crisis eating into roaming revenue.
However, post-paid churn is improving on the wireless front. The stock has fallen nearly 20% this year, and that's pushing its yield to a hearty 6.9%. AT&T shares will bounce back, and that dividend is safer than the market thinks. AT&T is a Dividend Aristocrat, coming through payout hikes every year since 1985. There's pressure -- from both retail investors and its most vocal activist stakeholder -- to keep that streak alive. It has a lot of levers it can pull to keep that going, and selling some of its underperforming assets may not be a bad idea in any scenario.
Success is relative at CenturyLink. The global communications and IT services provider has been posting negative organic revenue growth for years, but the pace of the top-line bleeding is decelerating. It's been able to limit the year-over-year slide to less than 4% in each of the past three quarters -- and the 3.4% quarterly dip it posted last week is its best showing in more than three years.
Cost controls are also starting to pan out. Net and adjusted income both inched higher in last week's second-quarter report. The stock's 9.5% yield may seem to be too good to be true, and unlike AT&T, this stock is no Dividend Aristocrat. CenturyLink did slash its payouts last year. However, it expects to generate roughly $3 billion in free cash flow for all of 2020, and its dividend will only gobble up about a third of that, with CenturyLink targeting a payout percentage of free cash flow in the 30s. The dividend is safe -- for now.
Wireless carriers may be suffering during the pandemic, with international roaming in check, but investors taking international roaming to heart may be wooed by Spain's Telefonica. With a strong presence across Europe as well as Latin America and a 10.6% yield, there's some interesting appeal to this geopolitically diversified globetrotter.
Revenue is declining for the fifth year in a row, and its latest quarter was its biggest top-line decline in four years. The good news is that Telefonica sees a return to organic revenue growth by 2022. It's already growing in its home country. It's also exploring its alternatives to trim its exposure to Latin American that has been a sore spot at Telefonica.
AT&T, CenturyLink, and Telefonica offer the best of both worlds. The attractive payouts make them popular dividend stocks. There's also capital appreciation upside as investors inevitably gravitate back to telcos in this low-interest-rate environment. The three stocks offer investors two ways to win.