Which Telecom Is the Best Dividend Stock?

If you like dividend stocks, then the telecommunications industry is a great place to look. Even the largest telecom stocks have some of the highest yields you'll find in the overall stock market, and some smaller players have extremely attractive yields that in some cases have proven too good to be true.

Telecom stocks generate huge amounts of cash from massive investments in the capital infrastructure of their networks. That makes it possible to cover above-average dividend payments that most companies outside the sector can't. Below, we'll look at several players in the space to see which one could be the best of the bunch.

Data source: Yahoo! Finance.

The biggest of the bunch

As you can see from the returns above, the past year hasn't been especially kind to telecom companies. A host of factors has put pressure on the industry, and even telecom giants haven't been immune to investor fears about the space.

First and foremost, competition in the wireless telecom space has pitted the industry's biggest players against each other in a brutal price war. While smaller national carriers have tended to compete mainly on price, Verizon and AT&T have all sought to retain at least some of their pricing power by arguing that their network quality is superior to that of their peers. The march toward 5G wireless networks in the U.S. will potentially help to support those claims, but they'll also require huge new capital investments from the major carriers.

Image source: Verizon Communications.

Also, certain parts of the telecom space have started to fade in importance. For example, much of AT&T's purchase of DirecTV hinged on the idea that customers would continue to buy television services as a separate purchase from other telecom needs. With cord-cutting options gaining in popularity that reduce the need for anything other than a broadband internet connection, sales of video and voice services have been under pressure and should remain so for the foreseeable future.

Finally, many see the growth opportunities for major telecoms to be limited, and that causes their stocks to trade somewhat like fixed-income investments. Rising interest rates have hurt bond prices recently, and top telecoms have also felt the pinch as investors demand greater dividend yields in order to hold shares.

BCE avoids some of these factors from its perch in the Canadian market. The parent of Bell Canada has been able to keep its wireless postpaid subscriber counts climbing, and rising demand for internet and video services has kept its traditional wireline operations relatively strong. By remaining a relatively pure play on telecom rather than trying to wrap in outside businesses or focus solely on cutting-edge technology, BCE combines many of the best attributes of wireless and wireline telecoms.

The lure of high yields

Some dividend investors want even better yields than the roughly 5% that AT&T and Verizon offer, and for them, double-digit percentages for CenturyLink and Consolidated Communications look particularly enticing. These two high-yield companies have their roots in the rural telecom industry, and they both have sought to keep profiting from legacy telecom customers who haven't been as quick to upgrade to more modernized services than others.

What investors have found is that these high yields typically tend to be unsustainable in the long run. Both Windstream and Frontier Communications specialized in the same general area in the telecom sector, and they previously sported dividend yields that were similarly attractive. Yet both stocks eventually decided to suspend their dividends in order to free up much-needed cash for other uses. CenturyLink hopes that its merger with Level 3 Communications will help it transform itself toward a more profitable side of the industry, but investors have feared that a dividend cut could be inevitable in the long run.

Where to get the dividends you want

Based on this brief look at these telecom names, BCE is the most intriguing dividend stock of the bunch. There's every reason to believe that BCE will be able to sustain its dividend, and at least thus far, the magnitude of price wars that U.S. carriers have seen hasn't replicated itself in the Great White North. Unless it does, BCE looks like the best choice in telecom for dividend investors.