The Worst Technology Dividend Stocks of 2016

By Markets Fool.com

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Back in the dot-com days, "technology dividend stock" was an oxymoron. The growth opportunities were so big that tech companies would never pay a dividend. Of course, many were so unprofitable that they could never afford to, either.

But that was then, and this is now. Some of the biggest technology names in the world now make regular payouts. But that alone doesn't mean you've picked a winner. The three stocks below all share three key traits:

  • They are at least $2 billion in size, based on market capitalization.
  • They all offer dividend yields of at least 2%.
  • They are down significantly year to date.

Read below to find out who they are -- and if they'd make good investments at today's prices.

Missing the days of the flip phone

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Nokia (NYSE: NOK) was a forced to be reckoned with when cellphones first started gaining traction. Since then, though, the company has had to pivot its business focus to wireless infrastructure equipment. But demand for the company's network products has been weak, and many now think the field is being rapidly commoditized -- which is bad news for investors.

So far this year, the company's stock is down 36%, and the stock is currently yielding a 6.5% dividend. But investors should be wary of this payout. In 2015, the company brought in 193 million euros in free cash flow but paid out 512 million euros in dividends. That simply isn't sustainable, and with business conditions continuing to work against Nokia, this might not be the type of tech dividend stock investors want to chase after.

Focusing on emerging telecom markets

For a long time, Vodafone (NASDAQ: VOD) was a major player in wireless connectivity in America. Through its shared ownership in Verizon Wireless, Vodafone was responsible for providing a lot of connectivity stateside. But after being bought out by Verizon, this British company decided to focus on Europe and -- even more so -- in emerging markets.

So far this year, shares of Vodafone are down 15%, making their yield jump all the way to 5.6%. Unlike Nokia, the dividend appears to be healthier. In 2015, just over 100% of free cash flow was used to pay its dividend. That might seem wildly unsustainable, but it's worth noting that many European companies have a different dividend policy than American ones. Instead of regular payouts every quarter at a predetermined level, Europeans often make one or two payouts per year, and base it entirely on the amount of free cash flow that has come in over the previous year.

In this view, it's worth noting that Vodafone's dividend payout could easily fall in the future, especially if competitive pressures continue to weigh on Europe. However, at the same time, a lower pound has made business more attractive for Vodafone customers. And it's too early to see how successful the company's operations in emerging markets will turn out to be. In general, this is probably the best bet of these three stocks for a potential investment.

Failing at customer service

Finally, we have Frontier Communications (NASDAQ: FTR), a stock that's down 30% so far in 2016 and is currently yielding an eye-popping 12.5%. But don't fall for that fat payout -- things aren't very pretty here.

Frontier's legacy business involves providing landline telephony in rural areas. It doesn't take much time to figure out that's a losing strategy. The company pivoted to bundling Internet with telephone for business clients and then started buying out properties from AT&Tand Verizonin Connecticut, Florida, Texas, and California.

There have been two big problems, though. First, the company has done a terrible job at transitioning customers in those four states away from their previous providers and onboarding them to Frontier. In fact, the company was the worst-rated of all providers in a recent survey.

Secondly, the company's dividend simply isn't sustainable. Over the past year, the company hasn't produced positive free cash flow. That means the dividend payouts are simply draining whatever cash the company has on hand. I wouldn't be the least bit surprised to see a dividend cut come soon. It's best to stay away from this one.

The best dividends for your portfolio

While it's fun to go dumpster-diving for big dividend yields, it's important to remember that there's a reason these yields are so high -- investors don't have much faith in the companies. While Vodafone might be worth chasing, I think investors can do better than putting their money behind Frontier or Nokia.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.