This Company Looks Like a Dividend Champion in the Making, and It Could Announce Another Dividend Hike Next Month

Key Points

• Dividend stocks can be great ways for investors to generate passive income.

• Good dividend companies generate enough money to cover and raise their dividends.

• This company just initiated its dividend in 2023 but has already hiked it significantly.

• 10 stocks we like better than T-Mobile US ›

Dividend stocks can be great ways for investors to generate reliable, passive income. But finding the right ones is more difficult than you might think. That's because stocks with ultra-high dividend yields may look appealing but have underlying issues. For instance, if a company struggles and its stock sinks significantly, the dividend yield will rise, but the company could still be at risk of a dividend cut.

It's key for investors to analyze company financials and make sure the company can continue to generate enough free cash flow and earnings to not only cover the dividend but also increase the dividend annually. I've found one company could be a Dividend Champion in the making and may even announce another dividend hike next month.

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Business is thriving

It's one of the larger mobile carriers in the U.S., and T-Mobile's (NASDAQ: TMUS) business has been thriving. Investors have rewarded the stock, sending shares up over 14% this year as of Aug. 14.

For the second-quarter, T-Mobile reported diluted earnings per share of $2.84, up 14% year over year. Total revenue grew nearly 7%. The solid performance was driven by new customer growth, including postpaid net customer additions of 1.7 million, the company's highest second-quarter additions ever and industry leading, according to T-Mobile. The company also grew 5G broadband customers by 454,000, up 12% year over year and industry-leading growth as well.

T-Mobile's success in part stems from its marketing strategy of being the "un-carrier," which essentially means trying to be the opposite of a traditional carrier by eliminating hidden fees and not forcing customers to sign longer-term, more prohibitive contracts.

Image source: Getty Images.

A newer dividend that could grow over time

T-Mobile is a relatively new dividend company, having only initiated its dividend in 2023. The quarterly dividend started at $0.65, but management hiked it to $0.88 in September of 2024, representing a 35% increase. That puts the annual yield at 1.40% at the current stock price, which is not a high dividend yield, but a quick start for a company that's been paying a dividend for less than two years.

The good news is the dividend looks more than sustainable for now and there's room to grow it. The company has a trailing 12-month free cash flow yield of 4.25% and a payout ratio of nearly 31%. To put that in terms that are easier to understand, T-Mobile has paid out about $3.78 billion of dividends over the last year. Management is guiding for $17.8 billion of free cash flow this year at the midpoint of its guidance, plenty to cover the dividend payout.

Another dividend hike could also be coming. When the company initiated the dividend at the end of 2023, management said their intent was to grow it 10% annually. The company declared its last dividend hike in September of 2024, meaning another hike could come next month based on the limited history we have.

Is T-Mobile a Dividend Champion in the making?

A Dividend Champion is a company that has raised its quarterly dividend for at least 25 straight years. T-Mobile is off to a good start but certainly has a long way to go, so it's no guarantee that it will become a Dividend Champion.

There are some risks including high debt. At the end of the second quarter, T-Mobile had $6.4 billion of short-term debt and over $75 billion of long-term debt. Meanwhile, cash and cash equivalents were roughly $10.3 billion. Part of the reason for this debt pile is due to all of the acquisitions T-Mobile has made in recent years, with eight acquisitions since 2021. This is certainly something for investors to keep an eye on.

However, the acquisitions as well as momentum in the business have translated into higher revenue and free-cash-flow growth. While I can't predict whether T-Mobile will become a Dividend Champion in 23 years, I like the trajectory of the dividend right now and certainly think the company is on the right path.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.