A High Dividend Yield That’s Surprisingly Safe
In today’s market, the number-one reason why investors tend to stay away from ultra-high yielders is the concern about their dividend safety. Think about it: when most companies pay less than four percent, how is it possible for a company to support a double-digit dividend yield?
Indeed, it’s not uncommon for a high-yield stock to cut its dividend. And as income investors with a long-term horizon, you’ll want to stay away from dividend cuts as far as possible.
Still, every once in awhile, you might come across a high-dividend stock whose payout is actually safe. I believe Consolidated Communications Holdings Inc (NASDAQ:CNSL) is a good example of this.
Headquartered in Mattoon, Illinois, Consolidated Communications is a broadband and business communications provider. Through its fiber optic network spanning over 36,000 route miles, the company offers a wide range of communications solutions, including voice, video, data, managed services, and cloud computing.
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Over the years, Consolidated Communications has built a diverse customer base. The company now serves consumers, businesses, and wireless companies and carriers.
The top reason to consider CNSL stock is its oversized dividends. The average S&P 500 company pays less than two percent at the moment. Consolidated Communications, on the other hand, pays quarterly distributions of $0.3874 per share, giving CNSL stock a jaw-dropping annual yield of 13.3%.
The company’s generous dividend policy is backed by a large and recurring business. Consolidated Communications operates in 24 states. It has 8,800 on-net buildings, 2,600 fiber-connected towers, and over 800,000 total data and Internet connections. Consumers, businesses, and wireless companies and carriers have to pay a regular fee (usually every month) to use Consolidated Communications’ infrastructure and services to stay connected. This allows the company to generate a recurring stream of revenue and profit and distribute some of the profit to shareholders in the form of dividends. (Source: “Consolidated Communications Investor Presentation,” Consolidated Communications Holdings Inc, last accessed February 5, 2018.)
The company also has a solid dividend history. Since CNSL stock started paying a dividend in 2005, it has never cut back its payout. This is particularly impressive when you take into account the fact that numerous companies have slashed their dividends during the Great Recession of 2008. (Source: “Dividend History,” Consolidated Communications Holdings Inc, last accessed February 5, 2018.)
And if you are still concerned about this high-yield stock’s dividend safety, a look at the company’s financials should be reassuring. In the third quarter of 2017, Consolidated Communications generated $47.8 million in cash available to pay dividends while actually paying $27.4 million in cash dividends. That translates to a rather conservative payout ratio of 57.4%. (Source: “Consolidated Communications Reports Third Quarter 2017 Results,” Consolidated Communications Holdings Inc, November 2, 2017.)
In the first nine months of 2017, the company had a payout ratio of 68.6%, which also left a sizable margin of safety.
Furthermore, Consolidated Communications has been growing its business through acquisitions. Last year, it closed a $1.5-billion acquisition of FairPoint Communications Inc. In the latest investor presentation, the company said that it is on track to meet or exceed the deal’s synergy target of $55.0 million within the first two years from closing. (Source: Consolidated Communications Holdings Inc, last accessed February 5, 2018, op cit.)
For investors looking for a company to boost the return of their income portfolio, Consolidated Communications is a top high-yield stock to consider.