Income Alert: Investors Have Another New (and Potentially Brilliant) Dividend Stock to Consider

T-Mobile (TMUS -0.06%) is finally going to start paying dividends. The wireless company added a cash payment as part of its capital return program. While its payout will pale in comparison to the big-time yields offered by rivals Verizon (VZ 1.17%) and AT&T (T 1.02%), dividend-focused investors shouldn't dismiss T-Mobile's dividend.

Here's why it could be an attractive option for investors.

A closer look at T-Mobile's dividend

T-Mobile recently unveiled its updated capital return program, which runs through the end of next year. It plans to return $19 billion to shareholders. That program includes a plan to pay about $3.75 billion in dividends over the next five quarters. That would leave about $15.25 billion for share repurchases. 

With nearly 1.2 billion outstanding shares, the $750 million quarterly dividend payment works out about to about $0.64 per share ($2.56 annualized). That implies a 1.8% dividend yield at the recent share price. On the one hand, that's higher than the S&P 500's 1.6% dividend yield. However, it's quite a bit less than the 7.6% dividend yields currently offered by Verizon and AT&T. 

That's largely because its rivals pay more of their cash flow in dividends. Verizon plans to pay over $11 billion in dividends, about 64% of its anticipated $17 billion in free cash flow this year, while AT&T's $8 billion dividend outlay is roughly half its free cash flow. Meanwhile, T-Mobile's dividend will be less than 20% of its total capital return program. It continues to prioritize share repurchases over dividends. Its rivals aren't currently buying back shares because of their focus on paying down debt to strengthen their balance sheets. 

Don't despise the small beginnings

Income-focused investors shouldn't dismiss T-Mobile's lower-yielding payout. That's because it has the potential to grow into a significantly more attractive income stream in the future. The company plans to increase its dividend by about 10% per year. 

Meanwhile, the dividend is only a tiny part of its total return potential. Historically, companies that have initiated dividends and grown them have delivered superior total returns:

Data source: Hartford Funds and Ned Davis Research.

T-Mobile's decision to initiate a dividend that it intends to grow puts it in an excellent position to deliver higher total returns for its investors than its wireless rivals. T-Mobile should grow its dividend a lot faster than Verizon. Its rival recently gave its investors another 2% raise. However, Verizon's slower-growing payout could make up the bulk of its total return. Meanwhile, AT&T cut its dividend by 46% after spinning off its media division last year. It won't be able to increase its payout until its leverage improves. Because of that, its stock could continue to lag. 

T-Mobile's meaningful share repurchase program could play a major role in supporting a rapidly rising dividend. The company's roughly $15.3 billion in share repurchases through the end of next year represents about 9.3% of its current market capitalization. Because of that, even if it maintained its $750 million per quarter dividend outlay, its per-share payout would rise at a decent clip since it would be making that payment across fewer outstanding shares. The combination of a falling share count, rapidly increasing dividend, and earnings-per-share growth could enable T-Mobile to produce market-beating total returns in the coming years. 

A potentially high-return dividend stock

T-Mobile's decision to start paying dividends could end up being a brilliant move. Companies that initiate and grow their dividends have historically outperformed the market by a wide margin. Because of that, dividend investors shouldn't dismiss the stock, even though it will offer a lower yield than its wireless rivals. It could produce a much higher total return in the long run.