Companies within the telecommunication industry are often a favorite of income investors, as many telecom stocks boast high dividend yields. Even better, many of these high yields are quite safe as they are well covered by earnings.
The top telecom stocks share a few key qualities. They have large customer bases and charge high prices for their broadband, wireless, cable, and other services.
These are high-demand services for customers, even during economic downturns, which fuels telecoms’ profits and dividends. One of the major telecom stocks is on the Dividend Aristocrats list.
This article will examine three of our favorite telecom stocks that have high dividend yields with safe dividend payouts, and also offer high total return potential. Even with the high yields, all of these telecom stocks have sustainable dividends with strong dividend coverage.
Our picks are:
Telecom Stock: AT&T (T)
AT&T has increased its dividend for 36 consecutive years. This qualifies the company as a Dividend Aristocrat, which are stocks in the S&P 500 that have at least 25 years of dividend growth. Membership in this index is very exclusive as there are fewer than 70 stocks that qualify as a Dividend Aristocrat.
AT&T stock provides a very high yield of 6.9%, considerably higher than the stock’s 10-year average yield of 5.6%. Using the annualized dividend of $2.08 and expected earnings-per-share of $3.20 for 2021, AT&T has a projected dividend payout ratio of 65%. This is below the decade-long average payout ratio of 68%.
Offsetting this high yield is the company’s habit of raising its dividend by a minimal amount, often a penny-per-share per quarter. This has been AT&T’s pattern dating back to 2010. As such, the dividend has a compound annual growth rate of less than 2% over the last decade.
One reason for the small increases over the long-term is that AT&T’s business hasn’t produced high rates of growth. Earnings-per-share grew at an annual rate of 3.8% between 2011 and 2020. Some of this does have to do with the COVID-19 impact on last year’s results, but we feel a 3% earnings growth rate through 2026 provides some margin of safety.
AT&T valuation continues to appear appealing. With shares trading at $30 and our expectation for earnings-per-share for the year, AT&T has a price-to-earnings ratio of 9.4. We feel that a five-year valuation target of 11 is appropriate for the stock as AT&T is very much a slow-growing company. Reverting to our earnings target by 2026 would mean that valuation could add 3.2% to total returns over this period of time.
Therefore, total returns for AT&T would consist of 3% EPS growth, the 6.8% dividend yield, and a 3.2% annual boost from a rising P/E multiple. AT&T stock could offer a total annual return of 13% through 2026. We rate this telecom stock as a buy due to its high yield, reasonable payout ratio and total return potential.
Verizon Communication (VZ)
Verizon is a major telecom stock in the U.S., with Verizon Wireless its flagship business.
The company’s premier wireless network enables Verizon to charge premium prices for its services, which results in a great deal of cash flow.
In 2020, Verizon generated operating cash flow of $41.8 billion and free cash flow of $23.6 billion. Operating cash flow increased 17%, while free cash flow rose 32% for the year.
Shareholders of Verizon Communication have received a dividend increase for 16 straight years. Shares currently yield 4.3%, slightly below the 10-year average yield of 4.6%. Meanwhile, Verizon is projected to distribute $2.51 of dividends per share this year. We expect the company to earn $5.08 per share in 2021, resulting in a projected payout ratio of just 49%. The expected payout ratio compares very favorably to the average payout of 62% since 2011.
Verizon has increased earnings-per-share at a rate of 8.6% over the last decade. We do note that growth has significantly slowed in the near term, so we expect earnings-per-share to grow at 4% per year for the next half-decade.
With a share price approaching $59, Verizon is trading at 11.4 times expected earnings. Our five-year price-to-earnings target is 13, implying a slight multiple expansion over the next few years that could add 2.7% to annual returns during this period of time.
Total returns could consist of:
- 4% earnings growth
- 3% dividend yield
- 7% multiple expansion
Shareholders could see 11% annual returns through 2026, earning Verizon a buy recommendation from Sure Dividend.
Telephone & Data Systems (TDS)
Telephone & Data Systems provides cellular and landline services, wireless products, cable, broadband and voice services across 24 states. Its Cellular Division accounts for the vast majority of revenue and is where the company houses its 82% stake in U.S. Cellular.
Last year was another one of steady growth for TDS even with the economy affected by the coronavirus pandemic, a testament to the steady business model of high-quality telecoms. For the full year, total operating revenues grew 1% while EPS soared 87% in 2020.
TDS has held up well during recessions, as consumers are reluctant to cut their telecommunications services. During the Great Recession, TDS’ earnings-per-share actually increased 69% from 2008-2010.
It has continued to generate growth even with the coronavirus pandemic over the past year. This recession resilience has allowed TDS to increase its dividend for 45 consecutive years. The stock has a current yield of 3%.
We estimate TDS could generate total returns of ~10% per year, consisting of dividends, earnings growth, and an expanding P/E multiple.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.