3 Telecom Stocks For Attractive Dividends

Ishtiaq is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This article initially stated Windstream had cut their dividend, they didn't. This article has been amended.

The telecommunication industry is a in a constant state of flux with broadband and wireless technologies radically transforming the industry dynamics. The US alone has a wireless penetration rate of 95%, with telecom companies eager to capitalize on these high growth figures. 

In this battle of technology, three companies emerge to the top namely Verizon (NYSE: VZ), AT&T (NYSE: T) and Windstream (NASDAQ: WIN).

Verizon Communication

Verizon reports its business operations in two broad segments namely Wireless and Wireline. Revenue share in the Wireline category shrank in response to the industry demand resulting in strategic divestures. Thus, growth in the company is mainly driven by the wireless segment. However, this segment is co-owned by Verizon and Vodafone (NASDAQ: VOD) – 45% of the segment is owned by Vodafone. There have been rumors that Verizon will buy Vodafone's stake, but there has been nothing concrete. Verizon has been able to maintain its market share with the use of broadband and cloud-services. The company invests heavily in expanding its business portfolio with recent developments such as fiber-optic based FiOS Internet and TV services.

Growth in the wireless market has recently shifted from wireless voice to mobile data. Verizon is the leading provider of wireless data with the launch of its 4G LTE Wireless network covering around 89% of the US population in 2013. Growth in the wireless category is likely to persist due to an explosive demand for mobile data. Verizon pays an annual dividend of $2.06 per share, yielding over 4%, and despite a large portion of the cash flows going to Vodafone; I believe Verizon is one of the best picks for dividend investment. Over the past twelve months, the company has generated about $13 billion in free cash flows, which indicates that the dividends will be easily covered with the cash flows.

AT&T

AT&T has a more diversified portfolio compared to Verizon with its presence recognized in segments of Wireless, Wireline, Advertising Solutions and others. The company has established a monopoly in the TV service segment with its ‘three-screen’ integration strategy and U-verse technology.

AT&T like all other Telecom giants has adjusted its business portfolio to the changing industry trends. Its recent transition included a shift from post-paid to smartphone services, one of the key drivers of growth in the company. Wireless segment too experienced a boost in revenue of 3.4% mainly driven by a staggering 21% growth in the data revenue.

AT&T pays an annual dividend of $1.80 per share, yielding over 5%. The company remains an extremely attractive dividend pick. As I mentioned above, business portfolio diversification has allowed the company to grow, and the growth has translated into cash flows. AT&T generated over $20 billion in free cash flows over the past twelve months, while the dividend payments were just over $10 billion. The payout ratio of about 50% of cash flows gives the company a lot of room to grow dividends in the future.

Windstream

Although Windstream Communications has a slightly different niche as compared to Verizon and AT&T, they do, nonetheless, have an overlapping audience. Windstream specializes in the provision of managed and cloud computing services to businesses. Furthermore, it provides broadband, phone and TV services to the rural areas.

The business model is an optimal mix of organic investments and acquisitions with its prime focus on business and broadband. Its recent collaboration with Avaya and Mitel for managed UC service offerings is two strategic moves that will enhance its customer base. Through these alliances a more unified communication services such as desktop video and VoIP lines will be made available.

Conclusion

All of the above mentioned companies are attractive dividend picks. However, AT&T is the best pick in my opinion. The company is a cash flows generating giant, which can easily maintain its dividends. On the other hand, Verizon’s most lucrative segment, Verizon Wireless, is co-owned by Vodafone, and a large chunk of its cash flows go to Vodafone. Nonetheless, the company should be able to maintain its dividends.However, I believe the current dividends are easily manageable and the company should continue to pay its dividends.

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Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool recommends Vodafone. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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