A great way to generate passive income is to invest in dividend stocks. Pick a company that can reliably pay you dividends for years, and your funds can grow substantially. In fact, dividend stocks have outperformed the S&P 500.

This year, T-Mobile (TMUS 0.35%) joins the ranks of businesses paying a dividend. It finally accompanies telecom rivals Verizon Communications and AT&T, which have provided dividends for years.

T-Mobile possessed many strengths even before it offered a dividend, such as its nascent 5G wireless network's coverage already available to 98% of Americans. So offering investors a passive income stream seems to only improve the case for owning T-Mobile stock.

But before buying shares just because T-Mobile is the newest dividend kid on the telecom block, it's worth digging into the company to assess whether T-Mobile truly is a good income investment.

T-Mobile's financial strength

One reason to consider T-Mobile stock for its dividend is the telecom industry's stability. Since telecommunication services are routinely in demand, even during recessions, telecom stocks are generally reliable investments.

T-Mobile has consistently performed well financially, underscoring this point. In the third quarter, the company's revenue from its wireless service operations increased 4% year over year to $15.9 billion. T-Mobile's service revenue growth is important since it accounted for 83% of the company's $19.3 billion in Q3 sales.

T-Mobile's Q3 service revenue success was no fluke. Through the first three quarters, service revenue reached $47.2 billion, a 3% year-over-year increase. Consequently, the company is on track to best its 2022 service revenue of $61.3 billion, which was a record high for the company.

T-Mobile is also focused on profitability, a key factor in its ability to pay dividends. For instance, the company could build out a fiber optic broadband network, as AT&T has done, but that's capital intensive. Instead, T-Mobile offers broadband through its 5G network, generating more income from the same assets.

The result of T-Mobile's prudent financial approach is illustrated in its Q3 net income of $2.1 billion, a substantial jump from the prior year's $508 million. As CEO Michael Sievert explained, "We're starting to realize the benefits of a disciplined strategy that has balanced growth and profitability so well over the last few years that we are now into a major shareholder return phase." Hence, the company's decision to provide shareholders with a dividend.

Details behind T-Mobile's dividend

Regarding T-Mobile's dividend, the first payment will be made on December 15 to shareholders who buy the stock before the ex-dividend date, which is November 30. The amount is $0.65 per share owned, the same as Verizon's dividend after increasing its payment in September.

T-Mobile's dividend payment is higher than the $0.52 offered by AT&T. The company plans to increase its dividend annually by about 10% although that's subject to change based on financials such as T-Mobile's free cash flow (FCF).

FCF is a key indicator of a company's ability to pay its dividend. That's where telecom companies shine since T-Mobile, AT&T, and Verizon all consistently generate significant FCF. In T-Mobile's case, its Q3 adjusted free cash flow of $4 billion was an impressive 94% increase from the prior year's $2.1 billion. Year to date, T-Mobile's FCF is $9.3 billion, up 70% compared to 2022.

Deciding on T-Mobile stock

The company is doing well, and its financial discipline is a sign that it can not only afford its new dividend, but can continue to fund it in the future. But there are some areas where T-Mobile is lacking compared to its telecom competitors.

One of the factors to consider in choosing a dividend stock is the dividend yield. This percentage indicates what you can expect in future income based on the stock price you pay today if the dividend didn't change. In this area, T-Mobile's current dividend yield of 1.8% is far below AT&T and Verizon's 7% and 7.3%, respectively.

Another factor is dividend history. T-Mobile has no history yet. Meanwhile, AT&T cut its dividend nearly in half last year as part of its divestiture of entertainment assets. In light of this, T-Mobile would be a better choice between these two telecom rivals.

But Verizon is another story. The company's September bump in its dividend was the 17th consecutive year of increases. This long dividend history, even during the pandemic when other companies cut dividends, is a testament to Verizon's reliability as an income stock.

As a result, if you're looking to invest in a dependable dividend stock as an income investment, Verizon is a better choice over T-Mobile given its long dividend history and superior yield.