It’s so sad when the markets drift lower and everyone’s paranoid — the promises dry up. I miss the days of the promised 1,500% gains from tiny oil explorers and mining microcaps, and the promised 900% gains from the next tech superstar … how’s a Gumshoe supposed to get excited about a 15-20% annual return?

But I suppose, in times of trouble, Mother Dividend comes to me, speaking words of wisdom, “cash in hand, cash in hand.”

And that’s what our friend Nilus Mattive (awesome name, eh?) is selling us with his new Dividend Superstars service from Weiss Research — a line on companies that pay high dividends that provide for much of their overall return.

I must admit to having a soft spot for dividends deep inside my cold, hard Gumshoe heart, so let’s look and see which ones Nilus thinks we should buy, shall we? After all, he did major in Theology, English and Philosophy at Scranton.

OK, that was just a friendly jab — he worked for S&P on their newsletters, so I’m sure we can stipulate that he’s a smart guy and knows the markets. And in the interests of fairness, the Gumshoe majored in government lo those many years ago when he trod the cold footpaths of an upstate NY university within a few hours of Scranton in his search for wisdom (and beer), and has never worked on Wall Street … or even considered an MBA.

But moving on, were we?

Nilus (did I mention that I love that name?) tells us about three special Dividend Superstars that we need to pick up right away — each one described in a special report that for some reason is valued at between $29-39. This Gumshoe writeup you’re reading right now, by the way — though totally free for you in this special limited time offer — is worth $18.43.

So let’s have a look at the three, shall we?

“Dividend Superstar #1: 10.1% Yield from a Rural Phone Company with Steady Revenues and a Huge Cash Nest-Egg”

This is all about a traditional telephone business — and these businesses, though generally considered to be in decline, do still make lots and lots of money off of capital investments that were, for the most part, made decades ago. That means buckets of free cash flow, and many landline telephone businesses pay good dividends (most of them are owned by the larger conglomerates, like Verizon and AT&T).

But this is one of a few rural telephone providers that is publicly traded and fairly large.

Here are Nilus’ clues:

“My favorite dividend-paying company in this space is proof positive: In the first quarter of 2008, it posted revenues of $105 million and profits of $49 million. Meanwhile, this company is busily selling other money-making services like high-speed Internet to its existing customers.

“The stock’s outsized dividend looks darn secure to me. The company has more than $34 million in cash that could be used for payments to shareholders.”

“… Bottom line: The stock’s annual yield is currently 10.1%, and as an extra bonus, I think the shares stand to increase substantially in price.”

So what are we dealing with here? I agree with Nilus that most of these kinds of companies are fairly steady, and that most of them are able to at least hold onto sales by upgrading people to DSL or similar add-on services that use their wires, though I don’t know that this automatically makes them good investments, even with a good dividend. Can the mighty Gumshoe Thinkolator make short work of these clues?

Indeed.

This is Consolidated Communications (CNSL)

And, to be clear, they didn’t have earnings of $49 million in the first quarter — that was EBITDA (earnings before interest, depreciation and amortization). They had cash flow of about $25 million in that quarter. Their revenue really was $105 million.

So this is a small rural telecom company — perhaps an acquisition target or an acquirer someday, since folks seem to think that this industry will continue to see consolidation (one of the bigger players, Citizens Communications, just merged with Frontier). It strikes me that this industry is all about stability — no one thinks they’re going to grow to any appreciable degree, but most poeple seem to think that they’re going to continue to generate a lot of cash and pay a decent dividend. The key for most of these folks is the extent to which new signups for broadband and other non-telephone services can make up for declining landline phone usage. So far, from a quick look at their filings, it looks like these guys are doing OK in that regard — they have some revenue growth still, but earnings are generally declining and the dividend is fairly stable. That can’t keep going forever, but for an old business that is slowly losing customers and not reinvesting too heavily they can probably continue to dividend out a lot of cash flow.

The dividend has been steady since 2005 at $1.55 a share, but do note that although that’s a current yield of better than 10%, the actual return on the stock has lagged the dividend because of a falling share price. Actual overall returns for the last three years, dividends included, would have been about 8% annually, and the company has fallen dramatically this year so the loss could be much greater if you had bought recently.

Essentially, what you see with companies like this is high leverage (debt is $800 million, market cap only $400 million), a heavy payout ratio (they paid out 72% of their “dividendable cash” last quarter, a number that was much higher than reported earnings), and a thirst for growth in IPTV and broadband subscriptions to make up for landline losses, but, in most cases, no signficiant promise for future earnings growth (analysts give this one a PEG ratio of 7, which is a wildly high number — this is not cheap on typical earnings valuation and growth metrics, it’s all about the dividend and free cash flow).

I haven’t looked at CNSL’s history, so I can just share those general thoughts on rural telecom. As to having enough cash on hand to support that dividend, that may be true as long as their cash flow remains OK (it probably should, usually the leak of landline customers is fairly slow, and they don’t reinvest all that much) — they do have more than $30 million in cash, which doesn’t strike me as that huge of a “nest egg” compared to their $800 million in debt … but you can call it as you see it.

Oh, and they report earnings next week — Thursday morning, so you’ll have a chance to look at some fresh numbers soon if you’re interested.

Superstars 2 and 3 coming shortly in a separate writeup … don’t worry, that rock-solid value of $18.43 will still be yours, free free free!