Both AT&T(T) and Verizon(VZ) Paying Out Over 6% in Dividends

Both AT&T(T) and Verizon(VZ) are paying out over 6% in dividends. That's a hefty chunk of change. One of these companies may have trouble maintaining the dividend according to the investment community.

AT&T is currently paying a $1.68/share for a yield of 6.50%. Verizon is paying $1.90 for a 6.40% dividend yield. Both are very attractive. According to a report in the Wall Street Journal though, Verizon may have trouble maintaining its high payout. According to the article:

"Verizon has lately relied on financial maneuvers to fund the payout, $5.3 billion in 2009. While Verizon reported free cash flow of $14.5 billion in 2009, all of that came from its 55%-owned wireless business. Verizon's reported wireless free cash flow was $14.8 billion, implying its fully owned operations—predominantly its "wire line" phone business—generated no free cash flow."

Because Verizon splits ownership of its fast-growing and profitable wireless business with Vodaphone, it's constrained in what it can do in terms of pulling cash out of the company.

Verizon also has a much richer valuation than AT&T. Take a look at some of these comparisons:

P/E Return on Equity Total debt to assets

AT&T 12.40 12.76 27.40

Verizon 23.05 8.76 26.82

AT&T looks better by all measures. From the same WSJ article:

"Despite the uncertainty all this creates, Verizon stock continues to trade at a premium to that of rival AT&T, when Verizon's earnings are adjusted for the wireless ownership. Sanford C. Bernstein estimates Verizon is trading at 5.6 times forecast 2010 earnings before interest, taxes, depreciation and amortization, while AT&T is at 5.4. And Vodafone is at 4.4 times, arguably reflecting no value for its Verizon Wireless stake."

For now, if you are looking for dividend yields in the telecom space, AT&T on paper looks like the winner. For a much risker play, Frontier(FTR) wireless is paying a 12.87% yield. The company also has a debt to asset ratio of 69.80, the highest of the telecom stocks I compared. As this article in high dividend yields points out, a high yield is often not sustainable and is a warning sign about the health of a company.