The two giant companies of the telecom sector, AT&T (NYSE:T) and Verizon (NYSE:VZ), both have long histories of paying large and regularly increasing dividends to shareholders. At the current dividend rate and stock price, AT&T pays investors a dividend yield of 5.7 percent. Verizon currently yields 5.2 percent. There is nothing wrong with these two stocks for dividend investors, but in the telecom sector, an investor can find stocks with higher yields and some potential for growth. Take a look at these three alternate investment ideas in the telecom sector for better yield potential.
A ranking of the S&P 500 stocks for dividend yields will usually place Frontier Communications (NASDAQ:FTR) near the top of the list. Currently, this stock sports a 9.1 percent dividend yield and a $4.36 billion market cap. Frontier provides telecom services - telephone, high speed Internet and cable/satellite to smaller communities in about half the U.S. states. In 2010, the company purchased the small market business of Verizon in 14 states. The acquisition doubled the size of Frontier Communications, and the integration of the new customer base is still ongoing. During the transition period, revenue growth has been flat and merger expenses high. For the first dividend of 2012, the payout was reduced from the previous 18.5 cents quarterly to 10 cents. Management stated the new dividend rate is more sustainable at 42 percent of free cash flow. If management guidance is correct, investors should see significant improvement in free cash flow later in 2012. There is significant risk that the company will not get expenses down as predicted.
Windstream Corporation (WIN) is a $7.0 billion market cap telecom company with a current 8.3 percent dividend yield. Windstream offers broadband Internet, telephone and digital television services to retail customers. Growth prospects are focused on high speed data and cloud storage services for commercial customers. Over the last five years, the company has completed the acquisition of eight smaller telecom companies. The acquisition of PAETEC at the end of 2011 added 36,000 miles of fiber optic cable to Windstream's network. The $1.00 annual dividend was 65 percent of adjusted free cash flow for 2011. Management projects cash flow will increase by a range of 7 to 20 percent in 2012. The 25 cent quarterly dividend has been paid consistently since 2007.
With a $23 billion market cap, CenturyLink (NYSE:CTL) is the largest company discussed here. The current version of CenturyLink is the result of merging CenturyTel, Embarq Corporation and Quest Communications over the last three years. The resulting company is one of the largest providers of fiber optic cable services and multi-channel communications plans. The current dividend yield is 7.5 percent due to a 7.25 cent quarterly dividend. The payout rate has been in effect since the first quarter of 2010. The current dividend is about half of free cash flow. For these high depreciation and amortization companies, watch the cash flow for dividend coverage, not the net income. Frontier Communications is the riskiest.
The three stocks discussed here will pay significantly higher yields than the telecom giants. They are also riskier, as the companies work to absorb and pay the cost of acquired assets. CenturyLink is the furthest along in the cost control game and is the most likely to again increase the dividend payout.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.