It's a crazy world out there. Whenever I try to get a read on the market's next move from the media, all I'm left with is a headache. I regularly listen to optimists and pessimists state their cases, and honestly, both sides often have compelling points. What strikes me is how uncertain the times are. The market could go up, down, or sideways, and I predict it will continue to surprise and embarrass people who try to guess where it will go next.
As uncertainty has reared its ugly head, I've started to become more and more interested in dividend stocks. Stocks certainly have problems, but they're preferable to bonds because of today's historically low interest rates.
It's hard to beat guaranteed returns in the form of cash dividend payments. What's more, companies can raise their dividend payouts from year to year unlike bonds, which have fixed coupon payments. This is a double-whammy -- stocks have the potential to pay more than bonds and to grow those payments.
Two distinct flavors
There are two distinct types of attractive dividend companies. The first is the company with a low dividend yield and a high dividend growth rate. The second is the company with a high dividend yield and low dividend growth rate. It's not a bad idea to have a healthy mix of both types of dividend payers, as they provide solid diversification.
Health care and consumer staples companies make excellent dividend payers and generally belong to the low-yield, high-growth side. I'd like to examine the other side of the spectrum today. The part of the market that's chock-full of high-yield, low-growth companies is the telecommunications services sector.
Telecommunications companies often pay out fat dividends, but they also come with their own unique sets of problems. They require plenty of capital investment, are usually mature, slow-growing businesses, and are often burdened with a lot of debt.
Let's examine some high-yield telecom stocks:
5 Year Annualized Dividend Growth
Source: Capital IQ, a division of Standard & Poor's.
All seven companies sport attractive dividend yields, and most of them trade at reasonable multiples of forward earnings. As such, I'm more interested in numbers that concern me. The two companies that stand out to me in the above table are Frontier and CenturyLink. The reason these stand out is the dividend growth rates of the two. Frontier's is negative, while CenturyLink's seems too high at first glance. A closer look into the two is warranted.
Frontier's negative dividend growth over the last five years is a bit misleading. The quarterly payout stayed remarkably steady at $0.25 for almost six years, but was cut down to $0.1875 last year. That might be a red flag to some, but I believe a willingness to cut a dividend that might be too high is admirable.
It's quite difficult for a company to grow a dividend of 9.2%, but it might not matter. Companies with lower dividend payouts would have to grow their dividends for many years to get to 9.2%.
CenturyLink's 64.3% annualized growth rate of its dividend over five years is obviously unsustainable. The immense number comes from the company's one-time dividend increase in 2008 from $0.0675 to $0.70. Since then, the company has increased its dividend again to its current quarterly payout of $0.725. Luckily, the tenfold increase of 2008 was perfectly sustainable -- CenturyLink only paid out 6.9% of earnings in 2007, the last full year of the minuscule payout.
Foolish bottom line
Telecom stocks offer stable, high-yield investments that can help offset riskier stocks and provide downside protection via the quarterly cash payouts. Despite their high dividend yields, some of them are still increasing their dividends today. These cash distributions represent visibility of returns that simply is not present in the broader market, which could go up or down in the blink of an eye.
Paul Chi has no positions in any of the companies mentioned in this article. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of France Telecom, Vodafone, and AT&T. 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.