Frontier Communications Company (FTR) is one of the most traded stocks. Its fantastic 16.8% historical dividend yield attracts considerable attention, and this attention leads to high trading volumes. Should internet investors focus their research on a glamor stock like FTR?
Certainly not. You will not receive yesterday's dividends. Frontier's future dividends will be paid out of earnings, and last year's dividends exceeded earnings by almost five times. Dividend investors should consider other dividend-yielding stocks with payout ratios that are less than 100% of their earnings.
From a total return perspective that considers capital gains and dividend payments, Frontier's earnings and future cash flows will determine its value. The attractiveness of a dividend stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its prospects for future dividends.
As alternatives to Frontier, consider the following stocks with strong track-records and solid credit scores:
10-Year Average ROE
Air T Inc.
Air Delivery & Freight Services
Chicago Rivet & Machine Co.
Auto Manufacturers - Major
Flexsteel Industries Inc.
Home Furnishings & Fixtures
Frisch's Restaurants Inc.
Nash Finch Co.
Telecom Services - Domestic
Unlike Frontier, these alternative stocks are all categorized as "safe" according to the Altman Z-score,* indicating that they are not considered bankruptcy risks. Moreover, the average 10-year return on equity demonstrates that AIRT, CVR, FLXS, FRS, and NAFC have grown shareholder wealth at a respectable annual rate. It is clear from these two metrics that each of these five alternative stocks is a "high" quality stock capable of weathering bad times and delivering positive long-term results.
What's more, these stocks are cheaper and have sustainable dividend payout ratios:
Based on lower price-to-earnings ratios, price-to-sales ratios, and price-to-book ratios, these stocks are cheaper than FTR at current market prices. These stocks also have sustainable dividend payout ratios while offering dividend yields in excess of the 10-year treasury yield. Rather than restrict yourself to concentrated investments in one notable stock like FTR, consider a diversified mix of these five securities as a more attractive alternative.
*Please read the article disclaimer.