AT&T (NYSE:T) has the juiciest dividend yield on the Dow Jones Industrial Average (DJINDICES:^DJI) Clocking in at 5.4%, AT&T's annual yield sure puts your average savings account to shame. Moreover, it's the 10th most generous dividend yield on the much wider S&P 500 index, so Ma Bell is doing more than just flexing her dividend muscles among limited competition.
Having a large telecom at the top of the dividend heap is no rarity, of course. AT&T and friends spent billions to build their wired and wireless networks over the years. With that expense out of the way, AT&T sits back to collect a very predictable stream of monthly payments from its corporate and consumer-level subscribers.
The company keeps taking on more debt to support infrastructure build-outs and maintenance, allowing AT&T to dole out huge dividend checks instead of paying off debt. Investors who hate large and growing debt balances should look elsewhere, but it's gravy for dividend lovers.
Mind you, AT&T's is not the most generous dividend yield among all telecoms today. Three of the top four yielders in the S&P 500 are telecoms.
Some would say that extremely high yields are a red flag over crazy, unsustainable business models. That's absolutely true in some cases. Double-digit dividend yields can be a quick way to find down-on-their-luck businesses that prefer to protect their yields over running a strong business for the long term. But it's not that scary when the yields stay large for years and years.
So how do the S&P 500's huge telecom yields look in the long term?
AT&T's dividend rests on solid cash flow and steadily rising quarterly payouts. This one's a Dow Jones blue chip for a reason. Let's move on to the lesser lights.
Frontier Communications (NASDAQ:FTR) had a scary moment in 2012, when yields popped north of 20%. The rural-oriented telecom was digesting a large acquisition at the time, and Frontier came through that self-inflicted crisis in the end. The dividend has floated down from nosebleed territory to a sustainable but very rewarding level.
CenturyLink (NYSE:CTL) held its dividend by a steady hand over the last five years. That is, until last December when the company's board cut the payout by 25%. The stock dropped and hasn't recovered, thus preserving the generous yield.
The company wasn't comfortable with the shrinking headroom to cover its dividend checks with free cash flow alone and took the cash-preserving way out of that quandary. Now, only half of CenturyLink's free cash flow goes into dividend payouts. The 2012 payout cut hurt, but the current policy is much more stable.
Which brings us to Windstream (NASDAQ:WIN), the highest dividend yield on the S&P 500 and perhaps the largest red flag among these high-yielding telecoms.
Windstream's yield has been racing higher and higher since 2011, but the company hasn't increased its payouts at all. Instead, the rising yield rests solely on lower share prices.
And it gets worse. The regional telecom carrier is losing customers in both of its core segments, so it's less of a strategy shift than an all-out rout. Windstream used to funnel less than 60% of its free cash flow into dividend payments, but that ratio now routinely sits above 80% and sometimes jumps above 100%. Translation: Windstream must either find a way to improve operations or give its dividends a serious haircut.
Three of these massive telecom dividends look fairly stable, but the fourth is actually a red flag. Dividend investing is more than just finding the highest payout and backing up the truck.