Adding a degree of risk to your income portfolio can not only keep things interesting, but potentially boost your returns. Obviously, this needs to be kept in check because many (most?) risky investments never pan out. So instead of a boost in return, the risky investments end up being a drag on your portfolio’s return.
Recently, at the bottom of unrelated Baron’s article was a short discussion of 3 high-yield telecom companies. Since I own one of the companies, follow another in my D4L-Dashboard and had looked at the third one in the past, the article piqued my interest. Below is the relevant text from the article:
The outsized excitement for corporate debt over equities is by now familiar. Eleven dollars in net inflows have gone to bond mutual funds for every net dollar into equity funds over the past three months, says Strategas Group.
The securities of telecom companies AT&T (T), Verizon (VZ) and CenturyTel (CTL) illustrate this: Their stock-dividend yields are between 6.4% and 8.3% — higher than their bond yields by one to three percentage points. Morgan Stanley strategists suggest that the stocks are a better deal, given the dividend sustainability (itself implied by the skimpy bond yields).
CenturyLink (CTL) (formerly CenturyTel) has been one of my high-risk success stories. The company provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. In June 2008, CTL announced plans to increase its annual dividend to $2.80, from $0.27 beginning in July and to accelerate its share repurchase plans. I was attracted to CTL’s relatively strong balance sheet and strong cash flows driven by the less-competitive nature of the mostly rural markets it serves. I purchased my first block of CTL in November 2008, with two additional blocks in early 2009. Though the company has not raised its dividend since the June 2008 increase, I am content with my nearly 10% yield on cost. During the time I’ve held the stock, the shares have increased 19%. Here is the Analysis I performed prior to the original purchase. I am currently over-allocated in the stock, so I am no longer buying. Even when I freeze the dividend at $0.70/share, my calculations show CTL is trading at a 2% discount.
AT&T Inc. (T) (formerly SBC Communications) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006. I have tracked this stock for some time drawn by its 6%+ yield. Its Debt To Total Capital of 44% and Free Cash Flow Payout of 49% are both excellent. Unfortunately, its dividend fundamentals have not been good enough to entice me to purchase it. By my calculations it is trading at a 29% premium.
Verizon Communications Inc. (VZ) offers wireline, wireless, and broadband services. This is a company that I have looked at several times, but its financials and the limited number of consecutive years it has increased its dividend has kept me from adding it to my watch list. By my calculations, VZ is trading at a 29% premium.
Based on the three company’s dividend fundamentals and valuations, CTL would be continue to be my first choice. As investors we should always remember that there is always a reason when a company sports a higher than average dividend. Care should be exercised to understand the reasons before investing.
Full Disclosure: Long CTL. See a list of all my income holdings here.
(Photo: sean carpenter)