3 Telecom Stocks with High Yield Dividends

Adding a degree of risk to your income portfolio can not only keep things interesting, but potentially boost your returns. Obviously, this needs to be kept in check because many (most?) risky investments never pan out. So instead of a boost in return, the risky investments end up being a drag on your portfolio’s return.

Recently, at the bottom of unrelated Barron’s article was a short discussion of 3 high-yield telecom companies. Since I own one of the companies, follow another in my D4L-Dashboard and had looked at the third one in the past, the article piqued my interest. Below is the relevant text from the article:

The outsized excitement for corporate debt over equities is by now familiar. Eleven dollars in net inflows have gone to bond mutual funds for every net dollar into equity funds over the past three months, says Strategas Group.

The securities of telecom companies AT&T (T), Verizon (VZ) and CenturyTel (CTL) illustrate this: Their stock-dividend yields are between 6.4% and 8.3% — higher than their bond yields by one to three percentage points. Morgan Stanley strategists suggest that the stocks are a better deal, given the dividend sustainability (itself implied by the skimpy bond yields).

CenturyLink (formerly CenturyTel) has been one of my high-risk success stories. The company provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. In June 2008, CTL announced plans to increase its annual dividend to $2.80, from $0.27 beginning in July and to accelerate its share repurchase plans. I was attracted to CTL’s relatively strong balance sheet and strong cash flows driven by the less-competitive nature of the mostly rural markets it serves. I purchased my first block of CTL in November 2008, with two additional blocks in early 2009.

Though the company has not raised its dividend since the June 2008 increase, I am content with my nearly 10% yield on cost. During the time I’ve held the stock, the shares have increased 19%. Here is the Analysis I performed prior to the original purchase. I am currently over-allocated in the stock, so I am no longer buying. Even when I freeze the dividend at $0.70/share, my calculations show CTL is trading at a 2% discount.

AT&T Inc. (formerly SBC Communications) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006. I have tracked this stock for some time drawn by its 6%+ yield. Its Debt To Total Capital of 44% and Free Cash Flow Payout of 49% are both excellent. Unfortunately, its dividend fundamentals have not been good enough to entice me to purchase it. By my calculations it is trading at a 29% premium.

Verizon Communications Inc. offers wireline, wireless, and broadband services. This is a company that I have looked at several times, but its financials and the limited number of consecutive years it has increased its dividend has kept me from adding it to my watch list. By my calculations, VZ is trading at a 29% premium.

Based on the three company’s dividend fundamentals and valuations, CTL would continue to be my first choice. As investors we should always remember that there is always a reason when a company sports a higher than average dividend. Care should be exercised to understand the reasons before investing.

Full Disclosure: Long CTL. See a list of all my income holdings here.

(Photo: sean carpenter)

Comments

[Dividend Gr...:]

I bought some AT&T a few weeks ago as part of a dividend strategy test. However I don't like the competitive nature of the telecom business, the high capex requirements and the suspiciously high dividend payout ratios.

Here's my analysis of Verizon:

www.dividendgrowthinve...

In 2008 cash flow was $7.57 per share. The capital expenditures required to maintain the business run at about $6/share. This leaves all remaining cash flow for dividends.

My analysis of AT&T:

www.dividendgrowthinve...

The company has the cash to pay the dividend at the moment. Since telecoms in general need a lot of cash to sustain their networks, the credit crunch could affect the payment down the road.

Overall I have a hold on both AT&T and Verizon...

Oct 28 10:51 AM

[YoYoMama:]

There are opportunities in smaller telecom companies. I recently bought PTNR, an Israeli company, on a dip. It has a decent P/FCF ratio, manageable debt, and currently offers a 7.67% dividend. Wait to buy, it's coming off resistance and heading towards a support line.

Oct 28 11:44 AM

[Uncle Pie:]

How about some dividends payable in currencies other than the rapidly falling US dollar? It's a big world out there!
Consider BCE (Bell Canada Enterprises) serving Eastern Canada
KKPNY, the telephone company in the Netherlands
TEF, Telefonica, serving Spain and parts of Latin America
SCMWY, Swisscom, the telephone company in Switzerland
SGAPY, Singapore Telecom with operations in India and Australia
All offer dividend yields from 4% to 7%, are favorably rated by broker research. The writer owns shares in all of the above.

Oct 28 01:52 PM

[mbkelly75:]

I am not impressed with VZ or T, but CTL has possibilities if only because of their outstanding record of paying that terrific dividend. Thank you for the article and the comments are useful also. A lot of good suggestions needing some more DD.

Oct 28 09:53 PM