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Telecoms Remain Alternatives for Expensive Utilities

Aaron Levitt Jul 13, 2016


“Risk” is quickly becoming a dirty four-letter word these days. Brexit, slowing growth in China, Europe and Japan, rising violence here in the U.S., etc. Point blank, these all indicate that things aren’t as rosy as investors would like them to be. So it’s no surprise that investors have dialed-down their risk profiles and bid-up shares of the safest sectors.


That includes plowing a hefty dose of cash into utilities.

However, investors may want to focus less on electricity generation or water treatment and set their sights instead on utilities’ “techier” twins. Telecommunications stocks could offer the best blend of dividend reliability, yield and growth to get them through the markets’ current malaise.


Utilities Near Record Highs


As things have gotten a tad bit wonky, investors have reached for all sorts of safe-haven asset classes and sectors. The tried-n-true utilities sector has surged under this scenario. The S&P 500 utilities index, as represented by the Utilities SPDR ETF (XLU) , managed to gain nearly 5.9% during the month of June. According to Bloomberg data, those utilities in the S&P 500 are now trading at the highest levels on record – stretching all the way back to 1989.

So utilities may have gotten a tad bit pricey and perhaps even overbought, especially when you consider their growth prospects – which for the larger regulated electricity and natural gas providers is close to nil.

However, for the telecoms, there’s still reason to cheer.


Dividends With a Side of Growth


For starters, the telecoms offer many of the same attributes that investors love about utilities. Namely, their large and steady dividends. Like owning a power grid, fiber-optic cable and other necessary pieces of telecommunications infrastructure, they are pretty much irreplaceable. That gives the telecoms a wide moat in the areas in which they operate. And let’s face facts – having access to the internet or wireless communication these days is just as vital and necessary as having access to clean water or electricity.

Moreover, firms within the sector are able to create steady revenue streams by locking subscribers into multi-year contracts. This allows the telecoms to project their future earnings with more accuracy and provide better profit potential.

As for that profit potential, it’s vast.

Standard utilities are often highly regulated and can only charge a certain amount for water or power. The telecoms, however, are free from such a burden. They can and do enact vast premiums on faster/advanced services or the latest phones. For income seekers, this translates into some of the highest dividend yields around.

And there is also growth available from the telecoms.

While traditional landline communication continues to shrink, high-speed video, mobile internet, digital cable services, m-commerce and wireless phones are quickly becoming the norm. Faster network rollouts and new devices are helping to power the telecoms profits and will do so into the future.


Dialing “T” for Telecom


Given the potential for current dividends and growth, investors may want to phone home a dose of telecom stocks.

The Vanguard Telecommunication Services ETF (VOX( makes an ideal broad play on the sector. VOX tracks a basket of 31 different telecoms in the U.S. and includes stalwarts like AT&T (T ) and Verizon (VZ ). The ETF’s broad focus allows it to yield a juicy 3.17%. Meanwhile, expenses are a Vanguard-low of just 0.12%.

With the average U.S. telecom stock yielding 4.9%, investors looking for more yield might be better suited to individual picks.

A prime spot to find them could be off the beaten path. 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. Centurylink (CTL ), Frontier Communications (FTR ) and Windstream (WIN ) all yield in excess of 7%.

Another potentially dividend-rich play is to buy the owners of the wireless infrastructures in the nation. Believe it or not, the vast bulk of the numerous cellular towers that dot our countryside aren’t owned by network providers like AT&T. AT&T basically rents out space on a tower like you would rent an apartment. That fact was enough to allow firms like American Tower Corporation (AMT ) and Crown Castle (CCI ) to be classified as REITs. While their headline yields aren’t anything to call home about (AMT yields only 1.72%, CCI 3.45%), their dividend growth rates have been stellar since converting to the tax structure.


The Bottom Line


For investors, the telecoms offer the best of both worlds. On one hand, you get stability and plenty of dividends. On the other, there’s plenty of high-tech growth to be had. The combination makes them the prime way to play the market’s current malaise. The previous picks – along with telecom stocks like France’s Orange SA (ORAN ) – make ideal plays on the sector.

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