Telephones Wikipedia
Are old-fashioned landlines on their way out? Image source: Wikimedia Commons.

Income investors have had to work especially hard in the current low-interest rate environment to get dependable payouts from their portfolios, and high-yield dividend stocks have, therefore, become more popular than ever. One of the highest yielding stocks in the market is Windstream Holdings (NASDAQ:WIN), which currently boasts a dividend that pays out almost 9% of its stock price annually. Yet, even though the stock has an impressive track record of sustaining its rich payout, Windstream has some investors questioning whether its dividend is too good to be true.

Windstream is a telecommunications company, but it primarily focuses on rural markets where antiquated technology, like landline phone service, is still prevalent. Slowly but surely, more modern telecom providers have eaten away at Windstream's legacy business, forcing it to respond with broadband Internet, video, and higher-end business services in order to sustain its market share and find more profitable business lines going forward. But, given that both Frontier Communications (NASDAQ:FTR) and CenturyLink (NYSE:CTL) have cut their previously high dividends, will Windstream have to do the same? Below, we'll take a closer look at Windstream.

Dividend Stats on Windstream

Current Quarterly Dividend Per Share

$0.25

Current Yield

8.7%

When Last Change in Dividend Was Made

2006

Earnings Payout Ratio

303%

Source: Yahoo! Finance.

Can Windstream's dividend survive?
Perhaps the biggest surprise for dividend investors is how long Windstream's payout has remained unchanged. Both of Windstream's major peers have had less success in sustaining their quarterly dividend payments. Frontier Communications slashed its dividend on two separate occasions, and now pays just $0.10 per share quarterly compared to $0.25 per share as recently as 2010. CenturyLink, meanwhile, made a more strategic shift in its dividend strategy: It reduced its quarterly payouts to investors by 25%, and instituted share buybacks to return some of that capital to shareholders.

By contrast, Windstream has kept its dividend at current levels for eight years, despite having a large debt load that it could have paid down using its cash flow, instead. So far, Windstream has been able to find the funds to give dividend payments top priority; but some of the company's followers have viewed declines not just in expected areas like landlines, but also in other business areas like residential broadband and commercial services, as a warning for Windstream's future.

Ftr
Source: Wikimedia Commons.

A big change is coming
Windstream made a big move recently that promises to shift the playing field for the company and its income-focused investors. The company announced in July that it would break itself into two pieces, with Windstream putting most of its network assets into a separately traded real estate investment trust. The remaining company will focus on providing service to customers, and will lease the network infrastructure from the REIT entity.

For dividend investors, Windstream's move will have huge consequences. REITs are required to pay out 90% of their taxable income in order to reap the benefits of not paying taxes at the entity level; as a result, the Windstream REIT will continue to pay a lucrative dividend. For the service company, though, Windstream anticipates annual dividends of just $0.10 per share, which will almost certainly cause the yield to plunge compared to its current price. Yet, from a financial standpoint, the service company should become much healthier, as it intends to shift a substantial portion of its debt onto the REIT.

Right now, buying Windstream stock gives you exposure to both future pieces of the pie. If you believe that Windstream will be able to squeeze more cash flow from its legacy assets while also growing in areas like business services and higher-margin residential products, then hanging onto both pieces of the current Windstream after its future split could give you both dividend income and appreciation potential. For those seeking maximum yield, though, the Windstream REIT will likely be the only remaining option once the deal goes through, and it won't offer much in the way of growth potential going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.