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All Contents © 2017The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 2016
Telecommunications stocks have long been a go-to source of generous dividends for income investors. No, these companies typically don't have strong growth prospects. What they do have is tremendous free cash flow -- cash profits left over after a company makes the capital expenditures needed to maintain the business -- and that supports sizable payouts. As long as phone and internet customers keep paying their bills every month, the sluice for dividends remains open. That's why telecoms often display low volatility relative to the broader stock market and make for good defensive holdings.
One caveat, however, is that an unusually high dividend yield can be a red flag for the sustainability of the payout stream. With that in mind, here are five telecom stocks with low volatility and high yields, ordered from lowest dividend yield to highest.
Prices and related figures are as of December 8, unless otherwise indicated. Volatility was determined by looking at each stock’s beta. A beta of 1 indicates a stock is as volatile as Standard & Poor’s 500-stock index, while a beta below 1 indicates a stock is less volatile than the broader market. All five telecom stocks have betas below 1.
Share price: $51.13
Dividend yield: 4.5%
One of the 30 components of the Dow Jones Industrial Average, Verizon has paid steady dividends for more than 30 years and has hiked its payout annually for the past 10. That's a dividend you can count on. Furthermore, the stock has an attractive balance of risk and reward. With a beta of just 0.39, Verizon offers a much smoother ride than the broader market. That's important because share-price volatility can increase the risk that an investor will buy high. At the same time, the stock is up a market-beating 11% year-to-date, and its yield is more than double that of the S&P 500.
In a bid to boost future earnings growth, Verizon is addressing the saturated telecom services market by investing heavily in digital mobile advertising and content. It bought web portal AOL last year and is now in the process of acquiring Yahoo.
Share price: $40.41
Dividend yield: 4.8%
The argument for investing in AT&T is pretty much the same as it is for Verizon. This is a blue-chip dividend stalwart with low volatility, a river of free cash flow and a plan to get in on the fast-growth markets of digital content and advertising. That's why AT&T acquired DirecTV last year and struck a deal to buy Time Warner earlier this year.
The wisdom of the Time Warner deal has been questioned by some -- and might even be quashed on regulatory grounds -- but that won't affect the annual payout. Indeed, given some of the criticism of the proposed acquisition, shares might actually rise if it doesn't go through. Most importantly, AT&T has raised its dividend every year for more than three decades.
Share price: $7.74
Dividend yield: 7.8%
This is where things get a bit trickier. Windstream Holdings is one of several regional telecoms with an unusually high dividend yield. That's nice on one hand, but a company offering such a lofty payout stream needs to be watched carefully. Any time the yield on a stock starts to hit levels that look too good to be true, investors need to ask if the dividend is sustainable.
For the foreseeable future, Windstream looks good for its current payout. The recent deal to acquire EarthLink Holdings will give it additional free cash flow to tap for dividend payments and debt reduction. The downside? Windstream comes up short on long-term price performance. While volatility is low, the shares lost nearly 60% of their value in the past five years, which more than wiped out any benefit dividends added to total returns.
Share price: $24.13
Dividend yield: 9.0%
CenturyLink is another regional telecom that raises eyebrows with its elevated dividend yield and poor long-term price performance. When research firm Evercore ISI initiated coverage of the stock in June with a “hold” rating, its analysts indicated that CenturyLink’s dividend is well supported by free cash flow through 2020. That's comforting as far as it goes, but the real benefits to dividend investing are unleashed after many years of rising payouts.
Meanwhile, share-price performance has been dismal. CenturyLink stock lost about one-third of its value over the past half decade. Although the firm has made strides in transitioning away from telephone services to consumer and enterprise broadband, internet protocol and other digital services, competition from cable companies remains stiff.
Share price: $3.70
Dividend yield: 11.4%
Any time you see a double-digit dividend yield, it's wise to go looking for cracks. Frontier Communications is yet another regional telecom with a sky-high yield and poor price performance. Shares are off about 20% so far this year and have done even worse over the long haul. Also telling, a large number of investors are betting that shares will continue to fall. More than 20% of the company's stock available for trading is sold short. (Short sellers sell borrowed stock with the hope of buying it back at a lower price and pocketing the difference.)
It's also fair to question the sustainability of the company's current dividend level, which remained flat in 2016 after seeing a 5% boost in 2015. Frontier spent more than $10 billion earlier this year to buy Verizon's wireline operations in California, Texas and Florida and has yet to see much benefit. That’s a weighty investment for a company that reported third-quarter revenue of $2.5 billion.
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