2 Dividends to Buy Before It's Too Late

We all know that the smartest investors buy dividend stocks. But investing in a good dividend is more than just finding a high yield.

If I told you with conviction that you could buy two high-yielding dividends in an industry that's growing at a CAGR of 78% for the next four years, would you want to? What if I then told you that these dividends were not just a part of that growing industry, but the essential part?

Cisco systems' recent report on mobile data traffic put hard numbers to what many of us have observed: the incredible and growing data appetite for smart phones, tablets, and laptops. The figures are overwhelming. Mobile data traffic was 0.6 exabytes (that's 600 million gigabytes) a month in 2011, and is expected to grow 18 times, to 10.6 exabytes a month, by 2016, when total smartphone traffic is expected to be 50 times greater than it is today, and tablet devices will likely generate as much traffic as today's entire global mobile network.

More than one way to make a profit in mobile
Of course, there are thousands of ways to play the mobile revolution. One would be to buy Corning (NYSE: GLW  ) , a supplier for mobile-device magician Apple (Nasdaq: AAPL  ) , or ARM Holdings (Nasdaq: ARHM  ) , whose technology powers Apple's iPad and iPhone devices. 

The problem with these bets, though, is that they are uncertain: Corning makes a great product, but Ashai Glass Company makes something that could be considered a Gorilla Glass substitute, has a similar P/E, and offers a 3.8% dividend yield. Despite the recent expectation-destroying performance of Apple, no one can say if their iSuite of products will still be the hottest devices five years from now. (Remember when BlackBerrys were the pinnacle of mobile excellence?) And with even the top experts unable to tell you who will make the best mobile chip three years from now, the sector is one of uncertain bets. These mobile plays all depend on a web of unforeseen manufacturer and consumer decisions that outstrips the risk tolerance of many investors. 

On to the picks already!
Now, I'm not saying these aren't great companies -- they are. But no one has a crystal ball to see which of them will continue to dominate a few years out. That's why I like Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) for the long-term mobile play.

These companies can both trace business segments back to the Ma Bell monopoly days, predating many of their customers. In their current form as the duopoly of the U.S. mobile arena they've outlasted many device fads, and a few macro-economic slumps. They were there when your Nokia brick phone was hot, and they hung around as you ditched it for your keyboard-sporting Blackberry, and then again as you upgraded to your shiny iPhone.

It's not just mobile devices they've outlasted, either: They've gobbled up competitors and watched as T-Mobile and Sprint have eroded to irrelevance. Verizon and AT&T control 68.6% of the domestic telecom market, up from 56.3% in mid-2010.

As mobile data explodes through 2016, it's going to increasingly be one of these two companies that delivers the content. Not only that, but Cisco estimates that by that time 9% of mobile users will have three or more mobile-connected devices, and mobile operators might offer more holistic packages to accommodate multiple devices.

Furthermore, these companies are more and more becoming the only two that can afford to buy more spectrum, more wireless capacity, to deliver more content. Verizon purchased $3.6 billion more spectrum in late 2011, and is set to enter 2012 with about 50% more spectrum than AT&T in many major markets.

What else?
And what about those dividends I mentioned earlier? Verizon yields 5.2%, while AT&T pays out 5.9%, making them the two highest-yielding components on the Dow Jones Industrials Average. In the last twelve months, they've had $13.5 billion and $14.4 billion in free cash flow, respectively, which will come in handy as they must ramp up their purchases of spectrum. With many customers, both wireless and wireline, engaged in multi-year contracts at either company, I don't see that free cash flow in jeopardy either.

And even better, Both companies are currently trading near their five-year lows with regard to their enterprise value and free cash flow.

Source: YCharts.

I'm slightly inclined towards Verizon for their cheaper EV/FCF metric, as well as their large spectrum advantage over AT&T. The biggest bear thesis out on these stocks right now is that they are essentially commodity plays with pinched margins. While that's a valid point, the fact that these two companies are absolutely essential to the mobile boom and they gush cash for investors, in my opinion, more than justifies their investment thesis.

Recap
So we've got two companies that are essential to the mobile data boom, with incredible staying power, 5%-plus dividend yields, annuity-like customer contracts, and a mountain of free cash flow to further entrench themselves. What's not to like?

These are truly great dividends. But if you're still wary about investing in these carriers, or just don't like the space in general, no worries -- there are still a ton of great high-yielding stocks out there. If you're looking for more, you can uncover 11 rock-solid dividends by clicking here. The report is free today, so download your copy now. Enjoy, and Fool on!

Austin Smith owns shares of Corning. The Motley Fool owns shares of Apple and Corning. Motley Fool newsletter services have recommended buying shares of Corning and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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