At the end of every month Bloomberg releases a list of indicated dividend yield rankings for the S&P 500 (SPY) sorted by industry. It lists the yield and payout ratio for each stock within the industry, as well as the industry average. This month, like most months, the telecom industry carried the highest average yield at 7.02%. Utilities were second at 4.37% and actually offer a safer play than telecoms due to their stability and monopoly like status.
Anyway, what’s disconcerting about the telecom industry is the high payout ratios. The industry average is 171.2%. This means that these companies, as a whole, are paying out $1.70 in dividends for every $1.00 of earnings. Many investors would argue that several of them have a long standing history of stable payouts so there is not much to worry about. Others would fret, and rightfully so. These stocks can be extremely volatile and require constant vigil, but for those who have the time they can offer a very profitable income stream plus long term growth prospects.
With that said we will look at the top 5 yields as of quarter ending. The yields and payout ratios will be based on this calculation, but the prices will be as current as possible.
Frontier Communications (FTR) – Frontier offers both the highest yield and the highest payout ratio on the list. It has been jumping around $8 and $9 for a few months and is currently toward the lower end of that range. It is currently yielding 9.35%, which is obviously much better than you can find in other industries, but the payout ratio is 346%, which leads people to question just how long the company can sustain these payments. It operates in the dying industry of wired telecom so there is not much room for growth and it should be noted that Verizon (VZ) didn’t want it and spun it off (which is the only reason I own the stock).
Windstream Corp (WIN) – It's probably safe to say that the best thing about Windstream is its ticker. But the yield is very good at 7.74% with a much lower payout ratio than Frontier, at 150%. The p/e is also much lower at 24 (Frontier’s is 42, normally an awesome number but not in this case). WIN has been trading in a tight range over the last 6 months and is at $13.01 right now. It also works in the wired realm, mainly in rural America, but people need internet access so they aren’t going anywhere. However, growth prospects are limited.
CenturyLink Inc (CTL) – CenturyLink, formerly CenturyTel, is probably the best dividend pick on this list. It is more than 3 times larger in terms of market cap than Frontier or Windstream. The yield is 7.2% with a payout ratio of 92%. The fact that it is under 100% is indeed a big deal. The p/e is also a low 13.7. The price has been a bit sporadic the last year, but if you look at a two year graph you can see the steady price appreciation. 10% growth in price over the next year would not be an unreasonable estimate; take the 7.2% on top of it and you have a decent pick up.
AT&T (T) – Breaking out of the wired telecom into wireless companies drops the yield down a bit (to a reasonable 5.5%) but offers even more price growth prospects. After AT&T’s acquisition of T-Mobile it became the largest telecom company in the world. The payout ratio is at 52% and the p/e is only 9. Quite frankly that’s pretty incredible. A recent a price jump may scare off first time buyers of the stock, but smartphones sales are still killin’ it. AT&T is now offering iPhones for only $50 and it'll make a whole lot off the service package.
Verizon (VZ) – The number two telecom behind AT&T is Verizon. The company actually had a marginal lead before the T-Mobile acquisition. It offers a very similar yield at 5.31% but the payout ratio is over 200%. This is bothersome and a focal point of dispute for many. The good thing is that it owns 50% of Verizon Wireless and is profiting off smartphone sales just like AT&T. I personally prefer Verizon’s service but this could certainly be a locational thing. The p/e is triple that of AT&T’s and it is very close to a 52 week high, so I would not advise buying Verizon right now.
Telecoms offer a very attractive income stream for investors that will pay out even in times of economic turbulence. The industry itself is safe because as mentioned, people need wired services and even if this market does not offer growth prospects the yields make up for it. AT&T and Verizon offer greater growth with only a slightly lower yield, so i would certainly be giving them a look.