Communications sector dividend stocks – October purchase

My site was down yesterday courtesy of my hosting company but it’s back up again now else you wouldn’t be reading this!

As it happens this is my first post about buying stocks in the Telecommunications sector which has finally become my lowest weighted sector. And it’ll be a short post too for reasons that will become clear. Oh the suspense!

Communications sector

The Communications sector (or Communication Services in Morningstar parlance) consists of companies involved in communications industry, originally landline telephone, fiber optics and now wireless. Many of the telecommunications companies have essentially become Utilities because wireless connectivity is such a mainstay of everyday life here in the US now.

YTD Total Returns for the entire sector are 4.24% which is third lowest of all 11 stock sectors (Utilities remain at first place with 15.19%) beating only Consumer Cyclical and the Industrials sectors.

Here’s my portfolio as of 03 October grouped by market sector. Communications is my lowest valued sector although it remains inside my +/- 10% rule.

My portfolio as of 03 October showing the Communications sector as the lowest weight, followed by Industrials and Consumer Defensive.
My portfolio as of 03 October showing the Communications sector as the lowest weight, followed by Industrials and Consumer Defensive.

My Communications sector dividend stocks

I currently have positions in T in the Communications sector.

AT&T

AT&T (T) is the third largest communications company in the world, below Verizon (2nd place) and China Mobile (1st place) with a market capitalization of $183B. It operates in three segments – Wireless, Wireline (landline and cable) and Other although the latter segment is only 1% of all revenue. It is additionally seeking growth through its Digital Life home automation service where it competes with Comcast among others, although the home automation industry is pretty fragmented due to lack of common standards.

T is a dividend Champion having increased its dividend for the last 30 years and it currently pays a dividend of $0.46 per share for a yield of 5.2%. It has been consistent in dividend increases; increasing them in January each year since 2004. Its current TTM payout ratio of 53% is similar to last year and 2010, although the ratio increased to 264% in 2011 reducing down to 141% in 2012 due to low earnings. The last 5 years’ annualized dividend growth from 2009 to 2014 is 2.3%.

Its P/E of 10.4 is below than the industry average of 16.2 and S&P 500 average of 18.4. With the exception of the low income 2011 and 2012, the P/E has been substantially below the S&P average so this year is no exception. T has low growth forecasts – its 5 year EPS growth estimate is 4.45%.

Other Communications stocks

I have just the one position in this sector in my portfolio, so I’m going to look at some new dividend paying stocks to see if there is something better I could purchase instead of adding to my current positions.

My usual high level screener applies as I start from the Dividend Champions list.

  • Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in (Communications)
  • Include only stocks with a dividend yield above 2%
  • Include only stocks with an estimated Next Year growth > 0%
  • Include only stocks with an estimated 5 Year growth > 0%
  • Exclude ADRs and non-US companies

This screener found only one other stock in the US Dividend Champions list!

Verizon

Verizon (VZ) is the larger rival to A&T in what amounts to a duopoly in the US with a combined 70% market share of the wireless market. It has a $206B market capitalization. Similar to AT&T, it’s organized primarily into Wireless and Wireline segments.

VZ has been promoted this year to a Dividend Contender, having increased its dividend for the last 10 years. Its current dividend of $0.55 gives it a yield of 4.3%. It has been increasing dividends consistently in October since 2009 and annualized dividend growth over the last 5 years is 4%. Its TTM payout ratio is currently 45% and has been greater than 100% for four years from 2009 through 2012, reaching a high of over 600% in 2012.

VZ’s P/E of 10.7 is similar to AT&T’s P/E, being well below the industry average of 16.2 and the S&P’s 18.4. For the most part over the last ten years, the P/E has been higher than the S&P average, but so far this year it’s below the 2013 level of 12.3. Projected EPS growth over the next 5 years is 6.5%.

Honorable mentions

British Telecom

British Telecom (BT) is excluded by my dividend screener since it’s a UK stock but it’s certainly worth considering if you’re looking outside the US, although yield is lower at 2.6% and a shorter dividend growth history at 5 years.

Vanguard Telecommunications ETF (VOX)

One way to gain instant diversification in this sector is the Vanguard Telecommunications ETF (VOX). I like ETFs in the sense that they’re lower risk since they hold more stocks than I can possibly manage and because they trade commission-free, they’re a cheaper way to get into investing. On the flip side, the fund isn’t focused on dividend stocks (although it pays a distribution annually), so it has a lower annual distribution of around 3% with an Expense Ratio of 0.14%.

In VOX’s case, it holds a total of 30 Communication stocks in its current portfolio although the top ten stocks occupy 70% of the net assets. It includes VZ, T, SBA, Century Link, Windstream, Frontier, T-Mobile and Sprint among its holdings.

What to buy?

T has a number of negatives against it; because of its high yield, its dividend payment is a projected 16% of my total dividend income next year which is above the 7.5% limit I’ve set myself. It also has a dividend growth rate below the 3% target I’ve set, so I’ve decided not to add to this position this time. So I’m going to start a new position in VZ and let the two stocks duke it out in my portfolio.

Here’s the outcome visually.

Yield #Yr DivGr5 P/O% Projected Stable Score Status
T 5.2 30 2.3 53.7 33 5 0 Hold
VZ 4.3 10 4.0 45.7 27 4 45 Buy

The score column shows the ranking I’m using and summarizes my analysis, it’s calculated from a weighting of the different criteria added together and aids me in valuing one stock over another. It tends to favor higher yields and stable payments.

My purchases this week

I’m adding to my Vanguard funds too this month as I continue investing the money from my house sale earlier this year.

So total purchases this week will be:

  • $300 Individual Stocks (VZ)

where the VZ shares are via an automatic trade from my Sharebuilder account.

This purchase should increase my yearly dividend income by about $12 and it’ll happen tomorrow.

Full disclosure: I am long T.

Sources: Morningstar, Finviz & Yahoo Finance. While every attempt is made for accuracy, mistakes can happen. Please conduct your own research and due diligence before making any stock purchase. Your investing goals and criteria for stocks are likely different than mine.

Previous Purchase

 

Quote of the day

A man, as a general rule, owes very little to what he is born with – a man is what he makes of himself.

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0 thoughts on “Communications sector dividend stocks – October purchase”

    1. Hi DFG,
      Yes I wanted more diversity but I like both companies and I think wireless will eventually replace even cable services. My cellular plan is with AT&T although I’m not quite ready to switch to their TV and broadband service yet, but I’m keeping an eye on the pros / cons there.

      Best wishes!
      -DL

  1. Div Lfe,

    Congrats ont he purchase! I just picked more AT&T up because it was a small % of my portfolio, took a few hits after the ex-dividend date and had that generous yield : ) I like how yo analyze the % of dividend income you get from there vs your whole portfolio, I am going to start tracking that internally. Congrats again on your VZ purchase, nice work!

    -Lanny

    1. Hi Lanny,
      Yes I wanted to buy more T too but thought it time to spread out a little and a little diversification never hurt! I want to keep income from a single stock less than 5% of the total income as a general rule.

      Best wishes,
      -DL

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