Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the communications equipment industry offer the most promising dividends.
Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.
As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."
When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:
The current yield
The dividend growth
The payout ratio
If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.
Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.
Peering intocommunications equipment
Dividend investors typically focus first on yield. Nokia (NYS: NOK) is among the highest-yielding stocks among communications equipment companies, offering 9.6%. But it's not necessarily your best bet. It has been struggling, with ratings agency Fitch recently downgrading its debt rating. Nokia's recent earnings report topped expectations due to sales of its Lumia 900 phone, but it still has a lot of catching up to do. Most importantly, CEO Stephen Elop said that he expects the company's board of directors to be "conservative" about a 2013 dividend.
Some communications equipment companies, such as 8x8 (NAS: EGHT) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. The company provides voice-over-Internet services to businesses and enjoys higher profit margins than many of its peers. It's boosting its cloud capabilities, but still faces competition.
Other companies, such as Alcatel-Lucent (NYS: ALU) , also pay no dividends, but that's because they've eliminated their previous payout, due to having fallen on some hard times. The stock has fallen 78% over the past year, with revenues falling and margins shrinking.
As I see it, Comtech Telecommunications (NAS: CMTL) and Corning (NYS: GLW) offer the best combination of dividend traits, sporting some income now and a good chance of solid dividend growth in the future. Comtech recently yielded 4%, while Corning yielded 2.4%. Offering satellite earth station equipment, among other things, Comtech has seen its revenue take a hit, but it's also racking up bookings and expects good things in the future. Much bigger, Corning is a major player in fiber optics and has been pressured by underwhelming LCD TV sales lately. Still, its Gorilla Glass is selling well, included in many iDevices, and Corning's fiber will be in greater demand by the telecom industry as the economy improves.
Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
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The article The Most Promising Dividends in Telecommunications Equipment originally appeared on Fool.com.
LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, owns shares of Corning, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Corning.Motley Fool newsletter serviceshave recommended buying shares of Corning. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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