5 Telecom Stocks Paying Big Dividends

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published 20 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.

Disclaimer

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.

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Verizon

Symbol: VZ
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.

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AT&T

Symbol: T
Share price: $40.41
Dividend yield: 4.8%

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Windstream Holdings

Symbol: WIN
Share price: $7.74
Dividend yield: 7.8%

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.

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CenturyLink

Symbol: CTL
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.

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Frontier Communications

Symbol: FTR
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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Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.

A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.