The Must-Own Sector for Rising Dividends

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LONDON -- Over the past decade, there has been a sea change in the telecom sector, and we're seeing a strong move toward regular and growing dividends, with 4%, 5%, and 6% yields becoming the norm.

That's a big change from the 90s and the early 2000s, when it was very much a growth story, and pumping every possible pound into "jam tomorrow" investment was the order of the day -- like the 22.5 billion pounds spent on U.K. 3G licences. But superfast broadband and efficient mobile computing are mature commodities these days, and the business has changed accordingly.

The free Motley Fool Report "Top Sectors for 2012" covers three strong sectors for investors in the current economic climate, and I reckon the telecom sector is vying for a place alongside them.


So who's paying out the big dividends?

The FTSE 100 giants
In May, BT Group  (NYS: BT) released full-year figures, and the things that stood out as highlights were cash flow, debt, and dividends. Net debt actually rose by 266 million pounds, but that was after making a 2 billion pound pension deficit payment, so that's being tackled, and its risk is receding. But the biggest news for me was the dividend, and it was good to hear it had been hiked by 12% to 8.3 pence per share.

Yet there was still better news: forecasts for future payouts. The board now expects dividends to grow by 10% to 15% annually for the next three years, and even at the lower end that means a yield of 4.4% on the current price of around 205 pence. That's not guaranteed, of course, but it shows both a commitment to rewarding investors and confidence in the future.

Vodafone  (NAS: VOD) is no different. The key point for me in its recent results announcement was a 7% rise in its ordinary dividend. At 9.52 pence per share, it represented a 5.6% yield on the day's price of 168 pence, rising to 6% on next year's forecast. And that forecast should be achieved: The company that pays out more cash each year than any other stock listed in the U.K. reiterated its target of 7% dividend growth per year. That aim was first issued as a three-year strategy in May 2010, and for the 2013 year the board is expecting to pay out no less than 10.18 pence per share.

Two mid-cap players
The smaller FTSE 250 telecom companies are playing the same game, too, and when KCOM (ISE: KCOM.L) delivered its full-year results a couple of weeks ago, its focus was also on dividends.

The company has a stated aim of raising its dividend by at least 10% per year, and it did that again quite comfortably. In fact, at 4 pence per share, it managed an 11% rise on the previous year's 3.6 pence for a yield of 5.8% on that day's share price of 69 pence.

Strong cash flow was there, too, helping get year-end net debt down to 75 million pounds. In proportion to KCOM's market capitalization, that's much better than either BT or Vodafone.

If we have a look at Telecom Plus  (ISE: TEP.L) , the firm that trades as Utility Warehouse to sell fixed-line mobile telecoms and broadband, bundled with electricity and gas, we see the same thing. The firm, which has an unusual and cost-effective marketing model, is a bit different from the others in that it has focused on organic growth, cash flow, low costs, and low debt right from its founding.

Full-year results released in May revealed a total payment of 17 pence per share, which is a massive rise of 23% on 2011's dividend. It did only represent a yield of 2.5%, but the long-term aim is to grow that dividend year after year. Telecom Plus doesn't have a specific dividend target, but it did say: "We anticipate further increases in dividends in future as our earnings continue to grow."

And even the tiddlersAnd then we have AIM-listed Alternative Networks, which is still a small, growing company with a market capitalization of less than 130 million pounds. Between 2007 and 2011, it grew its turnover from 72 million pounds per year to 117 million pounds while boosting its pretax profit from 8 million pounds to a forecast 15 million pounds for this year.

Is it reinvesting all of its profits in growth, like the telecom tiddlers of old? Not a bit of it. The dividend has been lifted year upon year, and there's a 10% hike forecast for this year, which would take it to a yield of more than 4% on its price of around 265 pence.

The telecom industry knows the punters don't want risk these days, but rather serious dividend income -- and the cash cow is grazing and getting fatter. That's good news for long-term Fools.

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At the time this article was published Alan does not own any shares mentioned in this article.Motley Fool newsletter services have recommended buying shares of Vodafone Group Public. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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