Looking For Big Dividends In Telecom

By Aaron Levitt | June 22, 2011 AAA

With the market's recent shake-out, many investors are once again thinking about their risk profiles. With memories of the Great Recession and credit crisis still fresh in many people's minds, the shift towards safer sectors has begun. Market sectors like health care and funds like the Consumer Staples Select Sector SPDR (NYSE:XLP) have once again become popular destinations for portfolios. These sector's recessionary resistant natures coupled with their high dividends make them perfect choices for a portfolio. However, one safety sector offers high dividends as well as the potential for long term growth. (To help you find a good investment in uncertain markets, check out 4 ETF Strategies For A Down Market.)

TUTORIAL: Investor's Guide To Telecom

Time to Phone Home
With interest rates continuing to hover near zero, investors may want to give telecommunications stocks a ring. Historically, the sector has earned its widow and orphan image. Up until the 1980s, the telecom industry was essentially a regulated monopoly. There was no internet, very few people had cable television and cellular phones were a fad. Now with advances in technology, the sector is quickly becoming a growth engine for a portfolio. While traditional landline communication continues to shrink, high-speed video, mobile internet, digital cable services, mobile commerce and wireless phones are quickly becoming the norm. So much so, that a recent survey by Ericsson showed that more than one third of smartphone owners use the device before getting out of bed in the morning. In the developed world, the telecom sector has become a perfect blend of both needs and wants.

In the emerging world, the telecommunications story is just beginning. Throughout the BRIC nations, higher incomes are producing an appetite for more advanced wireless services. Providers have begun to offer more value added services, such as music, news and text messaging, to create additional revenue streams and help stimulate "phone as lifestyle" device adoption similar to the developed world. The liberalization of telecommunications markets has enabled faster and less costly network rollouts, giving access to millions.

Aside from the growth opportunities, the telecom sector appeals to the value investors and income seekers alike. Telecommunications companies now account for only 3.09% of the S&P 500. This is nearly half the of the sectors 20-year average weighting and significantly lower than the 9% weighting telecom held during the dotcom 90s. The sector also offers a higher dividend yield than the S&P. The broad proxy for the sector, the iShares Dow Jones US Telecom (NYSE:IYZ) yields almost 3% versus the markets yield of 1.73%. (To learn more about the BRIC, read Understanding BRIC Investments.)

Placing the Call
For income seekers, the telecom sector is offering some of the strongest yields in the market today. These high yields plus the ability for capital gains could make the telecom sector the new craze. For investors, adding the sector is quite easy. Exchange traded funds such as the iShares S&P Global Telecommunications (NYSE:IXP) and the Vanguard Telecom Services ETF (NYSE:VOX) make adding a wide swath of the sector possible. However, bigger yields can be found in some individual names. Here are a few picks.

The plunging dollar is benefiting U.S. investors in Canadian stocks. Up 80% over the last two years, BCE (NYSE:BCE) is Canada's largest telecom company providing phone, internet and television services. Bell Canada currently yields 5.3% and over the last five years, the company has increased its dividend by 7.49% on average. Similarly, investors can look at Canuck rival Rogers Communications (NYSE:RCI) which yields 4%.

Rural telecoms offer investors some of the biggest yields in the sector. Generally, these firms offer local and long distance landline telephone services to areas with low population densities. Many also offer dial-up and broadband internet services as well as TV services. Alaska Communications (Nasdaq:ALSK) provides both wireless and traditional phone service for the state. The stock also provides a nearly 10%. Also focusing on rural America, Consolidated Communications (Nasdaq:CNSL) and Hickory (Nasdaq:HTCO) yield 8.1% and 4.8%, respectively.

Finally, for those who are feeling more adventurous, tapping into Indonesia could be portfolio gold. Servicing those 230 million potential customers is Telkom Indonesia (NYSE:TLK) as the most dominant telecom in the nation. Controlling virtually all the fixed line assets and about 45% of the faster growing wireless market in the nation, the company is poised to grow along with the nation's citizens. TLK yields 6.8%. (To learn more on growth stocks, see Steady Growth Stocks Win The Race.)

Bottom Line
For investors, the telecommunications sector offers high dividends as well as high capital gains opportunities. New technology adoptions in the developed world, coupled with basic service adoption in the emerging markets provide exactly the kind of growth that portfolios need. The previous picks are great way to add an investment in the sector. (To help you choose the telecom stock that fits your portfolio, check out How To Pick The Best Telecom Stocks.)

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