Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in North American telecom services offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."


When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  • The current yield
  • The dividend growth
  • The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business' expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into North American telecom services
Below, I've compiled some of the major dividend-paying players in the North American telecom services industry (and a few smaller outfits), ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

Windstream

11.8%

(1%)

333%

Consolidated Communications

10.5%

0%

378%

Frontier Communications

9.2%

(7.8%)

305%

CenturyLink

7.5%

58.6%

354%

BCE

5.4%

16.4%

69%

AT&T

5.3%

3.9%

230%

Verizon

4.8%

4%

185%

EarthLink

3.1%

(29%)*

182%

Atlantic Tele-Network

2.6%

10.3%

46%

Shenandoah Telecommunications

2.5%

4.9%

46%

Data: Motley Fool CAPS. *Past three years.

Dividend investors typically focus first on yield. Windstream (NAS: WIN) , Consolidated Communications, and Frontier Communications (NAS: FTR) are the highest-yielding stocks in the table above. But they're not necessarily your best bets. Each offers either a negative dividend growth or no growth rate, and each sports a sky-high payout ratio. It's also noteworthy that many times, extremely high yields are due to a stock having fallen. Indeed, Windstream, for example, is down 21% over the past year, and recently lowered its projections. With its free cash flow less than its payout, that dividend seems threatened. Frontier is down 15%, having posted a reasonably solid quarter recently, with revenue coming in a bit higher than expected, though free cash flow shrank.

Instead, let's focus on the dividend growth rate first, where CenturyLink (NYS: CTL) and BCE (NYS: BCE) lead the way. Their growth rates are so steep, though, that they may be hard to maintain for long. CenturyLink actually hasn't boosted its payout much in the past few years, after a big bump in 2008. It's the top dog in the rural telecom field, and seems better positioned than its rivals, thanks in part to several acquisitions. BCE, focused on Canada, has a more attractive payout ratio and offers a range of services, such as Internet and satellite TV. Its net margins are strong and growing, but its debt is growing, too.

Just right
As I see it, CenturyLink and BCE offer the best combination of dividend traits, sporting some solid income now and a reasonable chance of strong dividend growth in the future. You might also opt for the dividend yields near 10%, but if you do, keep an eye on the companies' progress, lest you end up blindsided by a big dividend cut. Some of the smaller players are also worth a look. Atlantic Tele-Network (NAS: ATNI) , for example, has a yield of only about 2.6%, but it has been growing that at a good clip, and has a lot of room for more growth. It serves the Caribbean and North America, and recently beat analysts' earnings estimates, as it boosted it profit margins. It's seeing its prepaid subscribership grow and is aiming to grow its postpaid subscriber rolls as well.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

If you're itching for a huge dividend payout, do your research first -- or let us help you with it. In our premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.

The article The Most Promising Dividends in Telecom Stocks originally appeared on Fool.com.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter,owns shares of Windstream. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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