3 High-Yield Telecom Stocks for Reliable Income

The telecommunications sector is often a favorite of income investors, as these stocks often provide high dividend yields. Just as important, the dividends are often well protected with strong underlying cash flow. Here, we will examine three top telecom companies for high yields. Telecom Stock #1: AT&T AT&T currently offers wireless, broadband and video service to go along with its media assets, including Turner, HBO and Warner Brothers studios. AT&T has a market capitalization of nearly $205 billion and generated revenue of $172 billion in 2020. After spending more than $150 billion over the past few years to grow into a media giant, AT&T recently declared some major changes. The company announced in mid-May that it would combine its WarnerMedia assets with Discovery, Inc. to create a new global media company. The new company will contain assets such as HBO, Warner Bros, Discovery, CNN. TNT others under one roof. The new entity will be one of the largest media companies in the world and AT&T shareholders would receive stock representing a 71% stake in the new company. AT&T will also receive $43 billion in cash, securities and retention of debt. The downside of this deal, at least to investors who hold AT&T for income purposes, is that the new company dividend will likely be reduced from the previous level. AT&T has raised its dividend for 36 consecutive years, qualifying the company has a Dividend Aristocrat, but the deal with Discovery will result in a lower payout due to the jettisoning of WarnerMedia. The company expects to pay out 40% to 43% of the projected $20 billion in free cash flow for the new AT&T, resulting in a dividend of approximately $1.15 per share compared to the $2.08 shareholders currently receive. Using our projected post-transaction dividend, the re-rated dividend yield would be around 4%. This is still a strong yield and is well above the average yield of 1.4% for the S&P 500 index. And, the new dividend payout will be much more secure. For the expected dividend following the divesting of WarnerMedia, the payout ratio drops to 36%. This means AT&T could return to dividend increases relatively quickly, especially if the merger synergies prove stronger than expected. Fundamentally, AT&T will be much more of a wireless company following the completion of the deal. Divesting its media assets will allow AT&T to focus on its core business, allowing it to take advantage of the 5G rollout that is taking place. The company's debt will also be addressed with the infusion of cash that AT&T will be given from Discovery and current shareholders will hold a significant portion of the new media company. For investors looking for a leaner telecom company equipped with a healthier balance sheet as well as a new stake in one of the larger media companies in the world, AT&T could be a solid investment option. Telecom Stock #2: Telephone & Data Systems Telephone & Data Systems is a smaller telecom company that operates in 24 U.S. states. The company's product offerings include cellular and landline services, wireless products, broadband, voice and cable. Telephone & Data Systems has a market capitalization of $2.7 billion and generated sales of $5.2 billion in 2020. Though it offers a wide range of services, Telephone & Data Systems' business is very reliant on its investment in U.S. Cellular, of which it owns an 82% stake. The company receives approximately three-quarters of its revenue from U.S. Cellular. Fortunately, Telephone & Data Systems should also benefit from the rollout of 5G as this should have a positive impact on the company's cellular business. In addition, the company is in the process of expanding its broadband customer connections in underserved areas. Telephone & Data Systems has a history of expanding in rural areas as the company started out as a collection of rural telephone companies. The company, therefore, has experience operating in these areas that might otherwise be too small for the larger telecom companies. Despite its relatively small size, Telephone & Data Systems has one of the longest dividend growth streaks in its industry at 45 years. The company last raised its dividend by 2.9% for the March 31, 2021 payment date. The dividend has a CAGR of 3.5% over the last decade and currently yields 3%. We expect Telephone & Data Systems to earn $1.80 in 2021. With an annualized dividend of $0.70, the projected payout ratio is 39% for the year. Excluding 2014 and 2018, when earnings per share drastically declined, the company has an average payout ratio of 45% since 2011. Telephone & Data Systems' dividend payout ratio is well covered by EPS and the yield is twice that of the average yield of the market index. The company's dividend growth rate, payout ratio and dividend growth streak are all appealing within the telecom industry. Telecom Stock #3: Verizon Communications Verizon's network covers nearly 300 million people and almost the entire geographically breadth of the U.S. The company offers wireless, broadband and cable services to customers. Verizon generated revenue of just under $35 billion last year and is valued at $233 billion today. The company receives the bulk of its revenue from wireless services, but also has a sizeable broadband and cable business. Verizon is also one of the clear leaders in the 5G arena, as the company has already established 5G service in parts of 70 U.S. cities such as New York City, Los Angeles, Chicago and Miami with plans to expand to parts of at least 80 cities by the end of 2021. Verizon has increased its dividend for 16 consecutive years, with the most recent raise resulting in dividend growth of 2% for the Nov. 2, 2020 payment. This is slightly below the company's 10-year average dividend growth rate of 2.3%. The stock offers a 4.5% dividend yield today. The annualized dividend stands at $2.51 and we believe the company will earn $5.08 per share this year, giving Verizon a projected payout ratio of 49%. This compares favorably to Verizon's average payout ratio of 62% since 2011 and would be the company's lowest payout ratio in more than a decade. Verizon's shareholders are receiving a yield that is more than three times that of the S&P 500 index and the payout ratio is expected to be less than 50% for this year. Verizon's dividend should continue to grow at a similar rate to that of its historical average.

3 High-Yield Telecom Stocks for Reliable Income

Thes top-ranked names have high yields and safe dividends.

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