Telephone and Data Systems (NYSE:TDS) Has Announced A Dividend Of $0.185

The board of Telephone and Data Systems, Inc. (NYSE:TDS) has announced that it will pay a dividend on the 29th of September, with investors receiving $0.185 per share. This payment means that the dividend yield will be 3.5%, which is around the industry average.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Telephone and Data Systems' stock price has increased by 219% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for Telephone and Data Systems

Telephone and Data Systems' Distributions May Be Difficult To Sustain

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Telephone and Data Systems is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. This gives us some comfort about the level of the dividend payments.

Looking forward, earnings per share is forecast to expand by 40.9% over the next year. It's encouraging to see things moving in the right direction, but this probably won't be enough for the company to turn a profit. The positive free cash flows give us some comfort, however, that the dividend could continue to be sustained.

Telephone and Data Systems Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was $0.49 in 2013, and the most recent fiscal year payment was $0.74. This implies that the company grew its distributions at a yearly rate of about 4.2% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth Potential Is Shaky

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Telephone and Data Systems' earnings per share has shrunk at 34% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Our Thoughts On Telephone and Data Systems' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Telephone and Data Systems' payments, as there could be some issues with sustaining them into the future. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. We don't think Telephone and Data Systems is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Telephone and Data Systems has 3 warning signs (and 2 which are potentially serious) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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