Regional telecom Lumen Technologies (LUMN 8.22%) offers one of the richest dividend yields among members of the S&P 500 index. Formerly known as CenturyLink, Lumen currently offers a dividend yield of 9.6%. Last week, Lumen announced another payout of $0.25 per share payable on Dec. 11.

Beefy dividend yields are good for your wallet, but only if the company can keep the payments coming over the long haul. Excessive yields can indicate difficult business trends as dividend yields soar for all the wrong reasons -- i.e., falling stock prices, not rising payouts. I'm afraid that Lumen fits that sad bill.

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What dividend investors are looking for

Generous yields may be eye-catching but they are only a small part of a bigger story. Truly effective dividend investments need to offer an entire framework of support for the good-looking payouts.

  • Dividend payments should rise over time, ideally showing higher payouts every year.
  • The growing dividend policy should be backed by an ample supply of free cash flows. In a perfect world, cash profits should also be rising year by year.
  • The actual business at the heart of it all must be poised to keep on trucking for years or decades to come. Compound growth makes a huge difference when it takes place over a very long time.

Can Lumen deliver all of that?

Unfortunately, Lumen Technologies is a perfect example of a poor dividend investment, despite its excellent yield of nearly 10%.

  • Lumen/CenturyLink has not increased its payout at any point in the last ten years. In fact, the company reduced its quarterly dividend checks from $0.72 to $0.54 per share in 2013. Six years later, the quarterly checks fell again. This time, they landed at $0.25 per share.
  • Lumen is spending roughly 40% of its free cash flows on dividend payments. The company is spending more than twice as much cash on debt repayment, compared to the annual dividend budget. However, the company is drowning in long-term debt to the tune of $32.5 billion. Telecoms like Lumen often carry heavy debt burdens because building and maintaining long-distance data and voice networks are expensive, but this company's debt load is excessive even by industry standards.
  • This company has a long history of watching its sales and cash flows sliding down over time, then showing dramatic jumps with the help of huge acquisitions. The $22.4 billion Qwest Communications in 2011 and the Level 3 buyout of 2017 propped up CenturyLink's financial results for a while but also added to that massive debt load. That does not point to financial stability in the coming decades.

LUMN Revenue (TTM) Chart

LUMN Revenue (TTM) data by YCharts

Please pick a different telecom dividend

Lumen passed the cash flow test but failed the rest of this dividend-quality gauntlet. It would surprise me to see this troubled company boosting its quarterly payouts anytime soon. The low-growth nature of the telecom industry tells me that Lumen is destined to repeat its costly growth-by-acquisition strategy.

It is not hard to find solid dividend stocks in the telecom sector, but Lumen is a struggling turnaround story that misses nearly every financial target. The juicy dividend yield is a direct result of Lumen's terrible market performance over the years.

LUMN Chart

LUMN data by YCharts