It’s hard to go wrong looking for income in the telecom sector. Telecom stocks are historically the best dividend performers in the market, averaging a nearly 5% dividend yield. The only other industry in the S&P 500 that can compare to telecom dividends is utilities.
That doesn’t mean picking dividend stocks in telecommunications is as easy as spinning around in a circle and buying whatever stock you happen to be pointing at. The popularity of telecom dividends caused the sector to be a bit overpriced.
A dividend stock with a 11% yield like Mobile Telesystems OJSC (NYSE:MBT) is a wolf in sheep’s clothing — MBT stock is down 30% in the last year, and sharp declines in share prices make a stock’s yield look oh too good to be true.
That’s why I put this list together of a few good telecom stocks and a few telecom dividend stocks you should pass on, at least for now.
Telecom Dividend Stocks to Buy: CenturyLink Inc (CTL)
Dividend Yield: 6.2%
Payout Ratio: 83.7%
The CenturyLink Inc (NYSE:CTL) brand may not ring bells the way Verizon Communications Inc (NYSE:VZ) or AT&T Inc (NYSE:T) can, but CTL’s dividend yield is nothing to sneeze at, boasting an annual payment of $2.16 and its business is looking very promising at this point.
It’s hard to overlook CTL’s inconsistency with dividend increases (it gave none in the last year), and its revenue is pressured from declines in its voice service and intercarrier reductions. The bright spot is CTL has an attractive free cash flow so it’s more likely CTL will hike its dividend rather than lay it out on the chopping block.
Just look at CTL’s free cash flow over the last year — more than $2.1 billion — and CTL paid out $1.2 billion in dividends, accounting for 56% of CenturyLink’s free cash. Compare that to AT&T and Verizon whose dividend percent of FCF accounts for 99% and 116%, respectively.
At first glance, CTL’s 25.6 price-to-earnings ratio is a bit off-putting, but CTL stock is actually a steal, trading at 9.6 times free cash flow with a forward price-to-earnings ratio of 14.
CenturyLink had been pivoting its business from landline for years and the telecom company has solid prospects for growth as CTL builds out its cloud hosting, IT services, Prism TV and broadband internet.
In its recent quarter, CTL gained 35,000 broadband subscribers and added 7,000 Prism TV customers.
Income investors could do worse than to add CTL stock to their portfolio.
Telecom Dividend Stocks to Sell: Frontier Communications Corp (FTR)
Dividend Yield: 7.4%
Payout Ratio: 247.1%
Let’s not mince words — Wall Street did not create all telecom dividend stocks equal. Despite its high yield, Frontier Communications Corp (NASDAQ:FTR) has been on the outs for the last month, seeing a roughly 22% selloff to CTL stock’s 1.6% loss. Back up three months and FTR stock dropped a harsh 32%.
Analysts, too, are increasingly bearish on FTR stock — Citigroup Inc (NYSE:C) analysts downgraded Frontier’s price target from $8.50 to $7.50, but still, that’s an 11% upside for FTR stock.
The downgrade comes on news of FTR’s soft earnings Tuesday, missing expectations on both earnings and revenue. This resulted in FTR stock dropping 11%, and its yield increased to 7%.
It gets worse — operating income declined 28% from last year and while cash flow from operations was up, FTR free cash flow was $197 million, compared to from $235 million in the same quarter a year ago.
FTR’s yield looks good on paper, but it’s the result of its share price taking a beating. It’s not all bad, though; and while FTR is finicky with increasing its dividend, the Connecticut company just boosted its dividend 5% to 10.5 cents a share.
Telecom Dividend Stocks to Buy: AT&T Inc. (T)
Dividend Yield: 5.6%
Payout Ratio: 74.6%
T stock has had a rough go of it — the stock is down 7.5% over the last year and fell another 3% in the past three months.
Here’s the thing, though: AT&T is a dividend aristocrat with 30 years of consecutive bragging rights. Though increases have slowed a bit to an annualized rate of 2.3% over the last five years, T’s annual dividend payment of $1.88 is among the best and most reliable in the tech industry.
First-quarter earnings for T were strong, but the telecom firm’s free cash flow declined to $3 billion from $3.02 from a year ago. That’s plenty enough to cover T’s dividend, but it’s a little nerve-wracking to see the margin of safety shrinking.
T may have some trouble spots that kept it from meeting revenue expectations, but it has immense promise in tablets, connected devices and in prepaid. To wit, the Dallas-based company added 1.2 million wireless subscribers in the first quarter and its DirecTV (NASDAQ:DTV) deal is all but sewn up, creating savings estimated at $2.5 billion from lowered content costs.
Telecom Dividend Stocks to Sell: Verizon Communications Inc. (VZ)
Dividend Yield: 4.4%
Payout Ratio: 57.6%
Now that Apple Inc (NASDAQ:AAPL) took T out of the Dow, VZ is the Dow’s top dividend stock, and VZ is up 6% YTD.
Verizon also made waves this week when it announced plans to purchase AOL, Inc. (NYSE:AOL) for $4.4 billion.
That’s not to say it’s entirely without problems ahead. VZ stock took a small plunge recently as publicity grew for T-Mobile US Inc’s (NYSE:TMUS) “never settle” campaign that targeted Verizon customers — a clever way to turn around a Verizon advertising campaign that used the hashtag #NeverSettle.
That’s the least of VZ’s troubles.
Google Inc.’s (NASDAQ:GOOG, NASDAQ:GOOGL) Project Fi could put a dent in Verizon’s margins a plunger couldn’t pop out. Consumers could fall in love with GOOG’s flat-rate data pricing and no throttled speeds or overcharges for going over data limits.
To put that in perspective, VZ’s attractive margins come from customers paying for data they never use. On average, Verizon’s users lose $27.86 from unused data every month, and if Project Fi creates a trend, that’s some serious trouble for VZ’s operating income.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
