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Telecom stocks are widely considered stable dividend stocks. In light of this industry bias, it is shocking to see that many top dividend telecom stocks like CenturyLink (CTL), AT&T (T), Verizon (VZ), and Windstream Corporation (WIN) have precariously high dividend payout ratios and weak Altman Z-scores.* Do dividend investors have a choice or are they forced to add to their telecom holdings?

As it turns out, investors have options. As alternatives to these telecom stocks, stocks across all industry were screened based on the following criteria:

Dividend yield. Each stock pays a dividend yield of at least 2.5%, which is in excess of the 10-year treasury bond and the dividend yield of the S&P 500.

Long term historical return on equity. Each of these stocks has positive average ROE over the past 10 years. This criterion filters for stocks which were able to endure and prosper over the economic downturn. Furthermore, this long term history filters out firms that are experiencing a short burst of good fortune.

A payout ratio under 0.60. These firms have more earnings from which to reinvest in the firm or increase dividend payments.

A "safe" Altman Z-score. None of these alternative firms have alarming bankruptcy risks.

The resulting dividend paying stocks are listed below for comparison with the telecom stocks:

Ticker

Company

Industry

10-Year Average ROE

Altman Z-score

Payout Ratio

AIRT

Air T Inc.

Air Delivery & Freight Services

12.8%

6.20

0.39

FRD

Friedman Industries Inc.

Steel & Iron

11.9%

7.86

0.37

MANT

ManTech International Corp.

Security Software & Services

12.0%

3.94

0.23

NHC

National Healthcare Corp.

Long-Term Care Facilities

13.8%

3.40

0.29

RIMG

Rimage Corp.

Data Storage Devices

13.2%

5.36

0.42

SSI

Stage Stores Inc.

Apparel Stores

10.6%

3.30

0.36

UVV

Universal Corp.

Tobacco Products, Other

13.2%

3.15

0.57

CTL

CenturyLink, Inc.

Telecom Services - Domestic

12.9%

0.80

2.71

T

AT&T, Inc.

Telecom Services - Domestic

15.0%

1.36

2.60

VZ

Verizon Communications

Telecom Services - Domestic

11.7%

1.12

2.33

WIN

Windstream Corporation

Telecom Services - Domestic

7.8%

0.97

3.14

Unlike CTL, T, VZ, and WIN, 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 (from the last ten reported fiscal years) demonstrates that these stocks a track record of growing shareholder wealth. It is clear from these two metrics that each of these four alternative stocks is a "high" quality stock capable of weathering bad times and delivering positive long-term results.

What's more, these alternative stocks are trading at cheaper price ratios than their telecom counterparts:

Ticker

Dividend Yield

P/E

P/S

P/B

P/Free Cash Flow

AIRT

2.7%

11.36

0.25

0.85

56.4

FRD

4.9%

7.85

0.45

1.16

23.2

MANT

2.5%

9.21

0.43

1.13

8.4

NHC

2.7%

10.92

0.79

1

18.9

RIMG

6.4%

14.96

1.26

0.78

10.3

SSI

2.5%

18.59

0.3

1.15

19.3

UVV

4.3%

15

0.43

0.89

9.9

CTL

7.4%

31.99

1.57

1.16

103.0

T

5.7%

46.77

1.44

1.73

41.9

VZ

5.2%

45.49

0.99

3.05

18.4

WIN

8.3%

36.64

1.36

4.74

0.0

Telecoms are not only stocks with dividend yield. Investors who dare to screen other stocks might find security based on financial stability and low payout ratios rather than the perception of a stable industry. (Remember when banking was considered safe?)

Better yet, these firms are trading at cheaper price multiples. Income investors ought to consider these alternative stocks as additions to their income portfolios. Moreover, they ought to carefully consider the safety of telecom stocks and their distributions rather than take them as a given.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

*The Altman Z-Score is a measure of bankruptcy risk that is not based on stock price volatility. This score places companies into three groups: "safe" (Z-score > 2.99), "grey" (Z-score between 2.99 and 1.81), and "distressed" (Z-score < 1.81), and is surprisingly useful for identifying bankruptcy risk in the coming year. This method of segmenting companies uses of fundamental (financial statement) data and market capitalization only, not on price volatility. Beyond credit risk prediction, companies with higher Z-scores have historically outperformed companies with lower Z-scores, in aggregate. One sector has not been accurately modeled: Altman's Z-score has not accurately predicted the bankruptcy risk of financial companies.

"Distressed" was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

Source: Dividend Alternatives To Telecoms