Finding a telecommunications company that pays a healthy dividend isn't that difficult. Finding a telecom stock that will continue to grow that dividend and provide you the chance for share appreciation as well … much tougher.
Many telecom companies generate huge cash flows and lure investors to buy into their highly debt-levered business by paying out handsome dividends that dwarf other sectors -- but not all are created equally. Here are two telecom dividends you can trust and one you might be better off avoiding.
Before you roll your eyes and give me the old "Thanks, Captain Obvious" speech, you should understand this: With the exception of an odd blip in 2003, AT&T has raised its dividend every year for the past 25 years.
Aside from being potentially the safest bet in all of telecom, it holds a few distinct advantages over rival Verizon
CenturyLink has been more like a kid in the candy store recently, snatching up Qwest Communications last year and successfully bidding for SAVVIS
Shareholders, on the other hand, have received a hefty reward, to the tune of a tenfold increase in its quarterly distribution within the past four years. CenturyLink currently yields more than 7%, one of the highest yields in the sector, and thanks to its recent purchases looks to produce more than $17 billion in revenue in 2012 from just $7 billion in 2010. On a book value basis, CenturyLink is still inexpensive, so there's still plenty of room for its stock and dividend to move higher.
I know I'm going against the grain here, especially with Frontier sporting an 8.9% dividend yield. But the goal is to find healthy dividend growth along with the potential for stock appreciation, and Frontier may fail to deliver on both fronts.
Frontier makes its business in the brick-and-mortar section of the telecom industry: landlines. The landline business offers a relatively stable cash flow which helps pump out that alluring dividend, but growth prospects are limited as is evidenced by the 4% revenue decline analysts predict next year. Even more disturbing, Frontier's quarterly dividend fell from $0.25 to $0.1875 last year and could fall further if its business remains stagnant. It's a company whose questionable growth prospects outweigh an otherwise high dividend yield.
In growth we trust
Dividend hunting involves more than just looking at a simple yield. Taking into account a company's dividend growth as well as future growth prospects can lead to more stable and potentially more profitable investments.
Which telecom company would be your top dividend pick? Share your thoughts in the comments section below and consider adding AT&T, CenturyLink and Frontier Communications, as well as your own personalized list of companies to My Watchlist.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. AT&T is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that puts investors first.