A High-Potential Industry With Dividends Above 8%

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the telecommunication industry to thrive over time as our planet's growing and developing population demands more and more communication tools and services, the SPDR S&P Telecom ETF (NYSE: XTL  ) 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 lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The SPDR ETF's expense ratio -- its annual fee -- is a relatively low 0.35%. The fund is very small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF doesn't have enough of a performance track record to assess, as it's extremely young. You can get a sense of its potential, though, by assessing the kinds of companies it invests in. 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.

What's in it?
More than a handful of telecom companies had strong performances over the past year. Brocade Communications  (Nasdaq: BRCD  ) , up 57%, has been outperforming analyst estimates and buying back shares. Its CEO is preparing to leave, and some are hoping that the company will be acquired. The company's growth rate has been shrinking in recent years, though, and further slowdowns are expected, worrying some investors.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Wireless broadband provider Clearwire  (Nasdaq: CLWR  ) fell 41%, partly due to regrettable bets on a WiMAX 4G standard, and partly due to slowing subscriber growth rates. It also has a hefty debt load (recently more than $4 billion) that has been growing in the past few years. On the plus side, Clearwire has renegotiated a deal with Sprint Nextel and it's making sure its new LTE standards are compatible with offerings in China.

Landline and rural specialist Windstream  (Nasdaq: WIN  ) shed 12%, and is also challenged by massive debt (close to $9 billion), which worries those drawn to its 10% dividend yield. It does generate significant free cash flow, though, and revenue has been growing, too, though the bottom line remains in the red. Windstream has also been making some strategic acquisitions and is aiming to boost its services to businesses. Still, it's reasonable to question whether its dividend will be maintained.

Frontier Communications (Nasdaq: FTR  ) , also focusing on rural regions, sports a dividend yield above 8%, and its stock has slumped 28% over the past year. It has been struggling with falling subscriber rates, steep debt, and financial conditions troubling enough to cause it to cut its dividend. Still, while its landline phone business isn't the most attractive, it's also developing its broadband offerings. Frontier acquired Verizon's rural business and does generate a lot of cash flow (nearly $1.5 billion annually), which had been rising until a recent dip. Investors got some good news recently, as the company upped its network speed, which should please customers.

The big picture
Demand for telecommunication products and services isn't going away any time 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're intrigued by Frontier's whopping dividend and wonder whether it's right for your portfolio, check out our premium report on the company, which comes with free updates throughout the year. 

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Verizon Communications and Windstream, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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11/24/2015 3:59 PM
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