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Despite the U.S. national debt, there is a silver lining for income
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| Telecom
Stocks with 8%+ Dividend Yields |
Published: January 24, 2006
The last time you phoned
someone, I bet you didn't think you were holding one of the
highest-yielding investments in the palm of your hand.
Yes, the average high-dividend rural telecom stock in the Lehman Telecom
Services Income Index now yields a monster 10.6%.
That's far better than the 2.1% yield offered by the average
dividend-paying member of the S&P 500 or the 4.4% you could get by
investing in a 10-year Treasury bill. Although they don't get nearly as
much attention on Wall Street, rural telecom stocks are also offering
higher yields than several much more popular income-oriented sectors.
These include real estate investment trusts (REITs), which now yield
just 5.1% on average, and master limited partnerships (MLPs), with an
average 5.8% yield.
Okay, so you're too savvy to be
enticed by yield alone. "Are the dividends safe?" you ask.
"Can I count on a steady income stream from these high-flying
dividend payers? Do they churn out the cash to keep delivering such
steep payouts?"
Many telecoms -- by which I mean firms that carry traditional phone,
wireless (cell phone), and Internet services -- are not a suitable place
to invest. Industry icon Verizon (VZ), for example, is down over -20%
this past year, while the entire North American Telecom Index just
slightly edged the S&P 500, with a +3.4% gain in 2005.
So, in looking for high-yielding telecom stocks with the staying power
to keep paying super-size dividends, I scoured the investment universe
far and wide. In the end, I discovered one in the far North of the U.S.,
another in the deep South, and yet another across the ocean in Southeast
Asia.
These three companies are miles away from each other, but they share
some key features that make them attractive income investments.
Telecom Checklist
If you use a cell phone or high-speed Internet, then you are part of the
reason telecom firms have been losing their traditional (fixed-line)
phone customers at an average rate of about -5% per year. Historically,
these customers have been the bread and butter for telecom companies,
providing them with a steady stream of annual cash flows.
Some telecoms have then reinvested that cash into new high-growth
markets like wireless communications and high-speed Internet. However,
other firms have lagged behind in these markets, and as a result,
they're seeing steady annual declines in total sales.
Therefore, before investing in any telecom stock, we're always careful
to check whether a firm is increasing sales of its wireless and Internet
services at a fast enough rate to more than offset declines in its
fixed-line phone business. When it comes to the three stocks we'll
profile in today's article, the answer is a resounding YES.
Sales are only half of the equation, though. The other question that's
key to a telecom's profitability is whether it can charge high enough
prices for its wireless and Internet services to more than cover the
expenses of upgrading its networks and attracting new customers. That's
tricky because the competition is stiff, but here again our three top
telecom stocks are making the grade.
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Telecom is a tough business.
It's competitive and it's also very capital intensive. The networks that
carry telephone, cell phone, and Internet signals to remote corners of
the country are expensive to build and maintain. That's why the average
rural telecom carrier in Lehman's Telecom Services Income Index sports a
relatively high debt-to-earnings ratio (a common industry debt measure)
of about 4.0.
The problem with heavy debt
loads -- if earnings decline, a company may have a hard time keeping up
with its dividend payments while also servicing its debt. Two of my
picks do carry fairly hefty debt loads, but all of them enjoy growing
earnings that should more than cover their stable dividend payments for
the foreseeable future.
Entry Opportunity
All three of the high-quality telecoms we'll profile today are committed
to paying out the bulk of their cash flow to shareholders. You may think
that the high-dividend model these firms have adopted would limit their
ability to reinvest cash and grow their businesses.
But what I like about these three telecom firms is that they generate
enough cash to both pay sizable dividends AND still invest heavily in
new growth opportunities. And even if future growth is more modest,
their huge dividend payouts should continue to attract investors and
support their share prices, especially in today's low interest rate/low
return market.
To view the names and
ticker symbols of these three high-yielding telecom stocks, plus an
in-depth analysis of each firm, please visit one of the links below .
. .
Important
Note: Throughout the remainder of this article, editor
Carla Pasternak provides an analysis of three high-quality rural telecom
stocks with dividend yields of 8% or more. However, in order to view the
remainder of this article, you'll need to subscribe to our premium
income-oriented newsletter -- High-Yield Investing. After
you subscribe you'll receive immediate access to the remainder of this
article, as well as our monthly High-Yield Investing
newsletter and a host of additional premium content. Please visit one of
the following links to continue...
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