Income is a big part of investors' returns. Stocks, mutual funds and fixed income ideas in this column are featured because they are relatively solid in their ability to pay dividends or interest. We're giving income investors a resource to start their research for investments that give better yields with lower risk.

September 30, 2009 - Iowa Telecom Services, Inc. (IWA) together with its subsidiaries, provides wireline local exchange telecommunications services to residential and business customers in rural Iowa, Minnesota, and Missouri. The company, an incumbent exchange carrier, offers local services that include basic local telephone service and enhanced local services, such as voice mail, caller ID, and call forwarding; network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on its network; and special access services to carriers and others.

This one is all about the dividend. Don't expect capital gains here or an upside surprise to earnings. Rather, focus on the yield and realize that even though it exceeds the company's earnings, a strong cash flow suggests that it is relatively safe for the time being.

The dividend payout for this year will be $1.62, the same as it was in 2006, 2007 and 2008. Since the stock is down, the yield has gone up, to 12.6%. The stock hit an all-time high in 2007, trading hands at $23.80. It's been pretty much all down hill since then. Again, this stock doesn't have the growth potential to suggest capital gains will be part of the reward of ownership.

However, there's a good solid business here. Earnings were a little disappointing for the second quarter, coming in at 8 cents instead of the consensus level of 15 cents a share. For the third quarter, analysts expect 14 cents a share, down from 18 cents in the third period of last year. For the fourth quarter, look for 15 cents, closer to the 16 cents of the fourth quarter last year. For the full year, consensus estimate is for 51 cents a share, down from 72 cents but next year, there should be a bounce to 57 cents a share.

While earnings have been slipping, revenues are still moving ahead. For this year, expect $249.03 million, up only slightly from $246.97 million. Next year, look for $253.29 million, up 1.7%.

Iowa Telecom continues to broaden its geographic reach. It recently bought Sherburne TeleSystems, a rural telco in Minnesota, for $81 million. Iowa Telecom started its Minnesota effort in the middle of last year when it bought Bishop Communications. The new buy, Sherburne, is expected to be immediatly accretive to free cash flow. That further enhances the safety of the dividend.

More numbers: This is a small company with a Market Cap of $414 million. Trailing P/E is 22.17. Price to sales is 1.7. Price to book is 2.2. Operating margin for the last 12 months was 25.41%. Profit margin was 7.46%. Return on equity was 8.86% while Return on assets was 4.81%. Total cash is $5.64 million. Total debt is $520.62 million or 72% of capital. Current ratio is .43. Book value per share is $5.85. The stock is down 31% over the last year. It traded as low as $9.94 on March 9 of this year. There are 32.71 million shares outstanding with a Float of 31.83 million. Institutions own 55.4% of the stock.

Income investors should find this stock interesting. While the dividend is the reason to own it, the company realizes its limitations and is working to expand its markets. As long as cash flow stays strong, the dividend will continue at these levels, maybe go a little higher. That should make it worth the wait while the company works on growing.

- Company Web site: www.iowatelecom.com

- Ted Allrich