Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Windstream Corporation (WIN), Frontier Communications Corp (FTR): How Safe are the 3 Largest Dividend Yields in the S&P 500?

The benefits of dividend investing are well known.

Companies with high dividend yields can offer both protection and support in any market environment. In a falling market solid dividends can reduce a portfolio’s losses and in a rising market, such as today’s, a strong yield can be used to improve performance and offset inflation while interest rates are low.

The question is, can the largest dividend yields in the S&P 500 be considered safe and secure for investors who are seeking to protect their portfolio or enhance returns with high yield stocks.

Let’s examine that.

The highest yields

Company P/E Dividend yield EPS DPS Payout Ratio
Windstream Corporation (NASDAQ:WIN) 30.6 12.1% $0.27 $1 370%
Frontier Communications Corp (NASDAQ:FTR) 26.6 9.4% $0.16 $0.4 250%
CenturyLink, Inc. (NYSE:CTL) 25.7 6% $1.41 $2.16 153%

Windstream has the highest yield in the S&P 500 followed closely by Frontier and then CenturyLink. Although, at first glance, none of the three companies above are able to cover their payouts with earnings but how do their cash flows look?

Windstream Corporation (NASDAQ:WIN)


Metric Q2 2012 Q3 2012 Q4 2012 Q1 2013
Net Operating Cash Flow $398 $406.8 $534 $304.6
Net Investing Cash Flow $287.6 $342.6 $295.8 $234.5
Cash Available for Financing Activities $110.4 $64.2 $238.2 $70.1
Dividends Paid $147 $147 $147.5 $148.1
Change in Capital Stock $0 $0 $0 $0
Issuance/(Reduction) of Debt $15.3 $148.4 ($75.7) $6.5
Free Cash Flow -$50.8 -$78.5 $163.5 -$87
Dividend Cover from Cash Available for Financing Activities 0.8x 0.4x 1.6x 0.5x

Figures in $US millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Windstream Corporation (NASDAQ:WIN) provides offers managed cloud computing services to businesses as well as the provision of broadband, voice and video services to residential, mainly rural customers.

Yielding 12.1% the company’s payout is around the same as many highly leverage mREITs and, as a result the yield is highly suspect. Indeed, as shown above, the company is not able to cover its dividend payout with its earnings-per-share.

The company’s cash flows reinforce the fact the company is indeed paying out more than it can afford. For the last four quarters, Windstream has only been able to cover its dividend payout once with its available cash flow, (after the deduction of investing activities).

During Q4 of 2012, Windstream Corporation (NASDAQ:WIN) was able to cover its payouts to shareholders but that has been the only quarter out of the last four where this has been the case. Indeed, during the other three quarter shown above the company has not been able to cover its payouts and has had to rely on borrowing in order to support payouts – which is not sustainable.

So, based on Windstream Corporation (NASDAQ:WIN)’s borrowing and lack of dividend cover I believe that the payout is unsafe and could be at risk of being cut in the near future.

Verdict: unsafe

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.