Behold: Huge Dividends and a Growing Industry


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the telecom industry to keep growing as our planet's population grows and our demand for communication products and services grow, the iShares Dow Jones U.S. Telecom ETF (NYS: IYZ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously. As a bonus, it was recently offering a dividend yield of roughly 3%, as well.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%.

This ETF has performed rather well, beating the world market over the past three years (though lagging it over the past five). As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 25%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Some telecom companies had strong performances over the past year. CenturyLink (NYS: CTL) , for example, surged 20%. The third-largest telecom company in America, it has been streamlining itself, cutting down from five to three operating divisions. It also offers a hefty dividend, yielding about 7%, that doesn't seem to be in any immediate danger, as some steep dividends are. CenturyLink has invested in some big acquisitions, buying Qwest and SAVVIS last year, with the latter bringing in cloud-computing exposure. Bears worry about the company's not-so-promising landline business, but it has been developing other income streams.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Frontier Communications (NYS: FTR) shrank by 40%, also challenged by its landline business. The company's dividend yield of more than 10% is a clear draw, but it has been cut recently, and might be cut again, perhaps to help pay down its steep (and rising) debt load. Frontier acquired Verizon's rural business and does generate a lot of cash flow, which had been rising, as well, until a recent dip.

Fellow landline and rural specialist Windstream (NYS: WIN) shed 17%, and is also challenged by massive debt -- which worries those drawn to its 10.3% dividend yield. Windstream has also been making some strategic acquisitions and is aiming to boost its services to businesses. At recent levels, some think it's priced attractively.

Then there's Level 3 Communications (NAS: LVLT) , down 43% and weighed down by a huge debt load -- so much so that it doesn't pay a dividend. Troubles in Europe have put pressure on performance, as it continues digesting its Global Crossing acquisition. Level 3 is reported to be seeking $1.4 billion in new debt in order to pay off some older debt. Overall, it's a risky picture, despite significant fiber-optic network assets.

The big picture
Demand for telecom services and products isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

If you'd like to add some substantial dividend income to your portfolio but aren't sold on the stocks above, check out one of our most popular free reports, "Secure Your Future With 9 Rock-Solid Dividend Stocks."

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LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, Fool owns shares of Windstream and Verizon Communications, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. 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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