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Why Telephone & Data Systems (TDS) is a Great Dividend Stock

Zacks Equity Research
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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Telephone & Data Systems in Focus

Telephone & Data Systems (TDS) is headquartered in Chicago, and is in the Utilities sector. The stock has seen a price change of 10% since the start of the year. The parent of U.S. Cellular and TDS Telecom is paying out a dividend of $0.16 per share at the moment, with a dividend yield of 2.09% compared to the Wireline - National industry's yield of 2.09% and the S&P 500's yield of 1.79%.

Looking at dividend growth, the company's current annualized dividend of $0.64 is up 3.2% from last year. Telephone & Data Systems has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 4.91%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. TDS's current payout ratio is 114%, meaning it paid out 114% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, TDS expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $0.68 per share, with earnings expected to increase 28.30% from the year ago period.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that TDS is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).


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