For investors interested in boosting their income, telecommunication stocks are a great place to look.
After several years of industry consolidation, the telecom industry is essentially a duopoly in the United States, with Verizon Communications(VZ) - Get Report and close rival AT&T controlling the majority of U.S. market share.
As a result, both companies are highly profitable and generate large amounts of cash flow, which they return to investors primarily through dividends.
Verizon Communications has a 4.3% dividend yield and has increased its dividend for nine years in a row. The company is one of Warren E. Buffett's 20 highest-yielding divided stocks.
Last year's increase was 2.7%, which isn't a high growth rate, but it nevertheless beats inflation.
Of the two industry leaders, Verizon Communications could be the growth pick, because of Verizon Wireless. Verizon Communications now owns all the wireless business, after purchasing the minority stake from Vodafone in a $130 billion transaction.
Verizon Wireless is a cash cow, bringing in $10.3 billion of earnings before interest, taxes, depreciation and amortization in the first half this year alone.
The wireless business generated a 47% segment EBITDA margin in the second quarter, compared with 43.9% a year earlier.
Compare this with the company's wire line business, which posted a 14% EBITDA margin during the quarter, and it is clear why Verizon Communications wanted to own all of Verizon Wireless.
Last year, Verizon Communications raked in $21 billion in free cash flow, a 57% increase from a year earlier. With its impressive cash flow, the company used $8.5 billion to pay shareholder dividends and $5.1 billion to buy back its stock.
The company distributed less than half of its free cash flow in dividends, which is a positive indicator that the dividend is sustainable. And, thanks to continued revenue and earnings growth, Verizon Communications should be able to continue increasing its dividend at rates that beat inflation.
The deal to acquire Verizon Wireless placed a large amount of long-term debt on Verizon Communications' balance sheet -- nearly $93 billion at the end of the second quarter. But the company is paying it off steadily, reducing its debt by $10.7 billion during the quarter.
Verizon Communications should be able to continue paying off its debt because it is so strongly profitable. The company is in a fortunate position that it can generate enough free cash flow to invest in the business for growth, repay debt, buy back stock and still have enough left over to sustain a high dividend yield.
Going forward, Verizon Communications plans to achieve growth through new areas, in particular digital advertising.
The company has made several acquisitions in this business, including spending $4.4 billion to buy AOL, and another $4.8 billion to buy Yahoo! These acquisitions give Verizon Communications access to another growth category.
In addition to pursuing growth through acquisitions, Verizon Communications is investing on its own.
Management has a multi-faceted growth strategy, which entails aggressive expansion in 5G capabilities and the Internet of Things. These initiatives should result in continued market leadership and steady growth.
Another positive note for Verizon Communications is that the company isn't being hurt by the strong dollar. Although most large-capitalization industry leaders are multi-national companies with significant international operations, Verizon Communications generates 100% of its earnings from the U.S.
This has proven to be extremely helpful over the past year, as the rally in the dollar has eroded revenue growth for many companies.
As a result, Verizon Communications has proven to be a very rewarding investment.
The stock not only offers an above-average dividend, but it has also gained 15% over the past year, compared with an 11% gain for the S&P 500, not including dividends.
Based on the closing price of $52.33 a share on Wednesday, the stock has a dividend yield of 4.3%.
Verizon Communications is a valuable stock to own in an income-focused portfolio because of its high dividend yield. It offers twice the dividend income as the average stock in the S&P 500.
Buying the stock could be a good move for both dividend investors and value investors. The company's high yield, reasonable valuation and stability make it a favorite of The 8 Rules of Dividend Investing.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.