For the Dividend Dukes of Telecom, Cash Is King

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Telecom operator CenturyLink (NYS: CTL) just got heartburn after swallowing rival Qwest. In the just-reported second quarter, unexpected depreciation and amortization adjustments to the Qwest merger took away $0.20 from the company's earnings per share; CenturyLink met its own earnings guidance only if you ignore this one-time non-cash charge.

But there's no doubt that the Qwest deal changed CenturyLink's business in a very real and fundamental sense. Comparing the combined company's $4.4 billion quarterly revenues to the pre-merger $1.8 billion from a year ago is a useless exercise.

It's more instructive to look at income and cash flows after considering all the costs of running two large telecom networks. Excluding that A&D adjustment, net income was down only 1.5% to $262 million. More importantly, the hard-to-manipulate free cash flows more than tripled thanks to Qwest, landing at $950 million.

CenturyLink uses some of that free cash to fuel one of the most generous dividend policies in the S&P 500 index. Here's a list of the top five yielders on that famous list:

Company

Dividend Yield

1-Year Return (Dividend-Adjusted)

CAPS Rating (out of 5)

Frontier Communications (NYS: FTR) 10.4%2.6%***
VeriSign (NAS: VRSN) *9%22.6%**
Windstream (NAS: WIN) 8.4%12%***
CenturyLink8.4%3.7%***
Pitney Bowes (NYS: PBI) 7.2%(12%)***

Data from Capital IQ, a Standard & Poor's company, and Motley Fool CAPS.
*Verisign's paid a special dividend of $2.75 in 2011 and a $3 dividend in 2010.

Three of these elite five dividend champs are American telecoms, and AT&T (NYS: T) lurks just outside this list with a 5.8% yield. It's a mature industry with little organic growth left to harvest, but full of subscriber lines generating tons of cash on a monthly basis. Even as consumers move off of copper-based landlines and onto mobile or Internet-powered voice services, the telecoms stand ready to take a cut of the replacement revenues as well. You just can't kill these guys, especially in the choice-starved rural areas where Windstream, Frontier, and CenturyLink mainly ply their trade.

Adding Qwest to CenturyLink's arsenal guaranteed healthy cash flows and thus stable dividends for many years to come. The occasional non-cash writedown is a small price to pay, especially since those charges don't factor into cash flows except for reducing the company's tax bill.

So enjoy the lower entry price and the boosted dividend yields that goes along with it -- CenturyLink is poised to pay you back in spades. Defense wins Super Bowls and dividends make you rich. Learn more about safe dividends that crush every savings account on the market in this special report on 13 high-yielders you can buy today. The report is totally free -- just click away and enjoy!

At the time this article was published Fool contributor Anders Bylund holds no position in any of the companies discussed here.Motley Fool newsletter serviceshave recommended buying shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.

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