U.S. Treasury bonds are yielding so little these days. The 10-year Treasury bonds only yield about 2% annually, which is even lower than our expectation of 3% inflation per year over the next 10 years. Investors will probably be much better off by investing in stocks with high dividend yields. You may think the equity market is much riskier and, well, it is. But in our view, high dividend stocks can provide much better risk-return combinations than Treasuries. In addition, you can limit your downside risk by investing in a well-diversified portfolio of dividend stocks. In this article, we are going to discuss the three large-cap telecom stocks with high dividend yields.
AT&T Inc (T): AT&T has a dividend yield of 5.70%, almost tripling that of a 10-year Treasury bond. The company also has an impressive track record of increasing its dividend payouts. It has been continuously raising its dividends for the past 28 years. Recently it increased its quarterly dividends from $0.43 per share to $0.44 per share, which were paid to its shareholders in February. AT&T's current payout ratio of 250% is a bit high though. However, this seems to be a one-time thing as its forward P/E ratio is only 12.15, which indicates that its payout ratio for 2012 will be lower than 80%. The company is expected to grow its earnings at a 4% rate per year. We believe analysts are too pessimistic. AT&T is going to repurchase 300 million shares this year. Management has announced that they will begin executing the share repurchase program immediately and aggressively. We think the share repurchase will boost EPS growth to at least 8%.
With regard to valuation, AT&T's forward P/E ratio of 12.15 is lower than the 15.5 for the average of telecom stocks. AT&T's main competitor, Verizon Communications Inc (VZ), also has a slightly higher forward P/E ratio of 13.91. Similar to AT&T, Verizon is facing pressure in wireless margins. We think its earnings growth is mainly dependent on how much its wireless margins expand. Analysts are slightly more optimistic about Verizon's future growth. They estimate its earnings will grow at over 6% annually in the next couple of years. Verizon also has a high dividend yield of 5.17% and has been raising its dividend payouts for seven consecutive years. We like both stocks but we love AT&T more. Not only because the company's current dividend yield is a bit higher and its record of increasing its dividends is stronger, but also because it has a lower valuation and higher growth potential when its share repurchase plan is taken into account.
CenturyLink Inc (CTL) has a dividend yield of 7.43%. In 2008, the company significantly increased its quarterly dividend from $0.0675 per share to $0.6325 per share, almost ten times the dividend paid before. Today it pays a quarterly dividend of $0.725 per share to its shareholders. We think high dividend lovers may purchase CenturyLink for short term to get its fat dividends, but we do not recommend investors to hold the stock for longer periods as the company has a high payout ratio of 271% and its valuation level is also relatively high. CenturyLink's forward P/E ratio is 16.06, a bit higher than 15.48 for its peers. Moreover, the company increased its size in a relatively short period of time by continuously merging with other firms over the past couple of years. For example, last year, it merged with Qwest Communications in April and with Savvis Inc in July. Now CenturyLink is adjusting its business under a slow economy. Despite its larger dividend yield, we think AT&T and Verizon are much more attractive than CenturyLink over the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.