2 Communication Equipment Dividends You Can Buy Right Now and 1 to Avoid

Telecom service providers are spending billions on infrastructure upgrades and these two dividend stocks stand poised to benefit in a big way. Of course, not everyone is invited to the party, and there's one dividend-paying company you might be best passing on.

Jul 25, 2014 at 11:30AM

If it seems like the rally in the technology sector has run its course, you're not alone. Social media companies have far and wide exploded higher, while cloud-computing stocks with no discernible profit potential in the near term have been off to the races for more than a year.

But there are still patches of the tech sector where strong growth is not only possible, but probable. Spending from telecom services companies has been fierce and competitive in an effort to expand their IT infrastructure and cloud bandwidth to stand out from the crowd. The end result is that these billions of dollars being spent on next-generation infrastructure upgrades are going to trickle-down to the telecom equipment sector and could sustain growth here for years to come, whether or not the global economy cooperates.

Source: UltraSlo1, Flickr

With that in mind today I'm suggesting we take a closer look at two communication equipment dividend-paying stocks that appear to be buy-worthy, while also highlighting a dividend-paying communication equipment supplier that investors might be best off avoiding.

Two communication equipment dividends you can buy
Without further ado, here are two communication equipment stocks you can consider buying right now.

Qualcomm (NASDAQ:QCOM)
I'll repeat what I said last year when I took a closer look at Qualcomm: It's good to be the king of wireless connectivity!

Qualcomm is by far the dominant leader in CDMA wireless technologies used in smartphones, such as Apple's iPhone and the Samsung Galaxy S5. What keeps Qualcomm at the front of the pack by a mile is its collaborations with key wireless technology producers around the globe and its world-class patent portfolio.

In addition to providing technologies that enhance consumers' 3G, 4G, and 4G LTE experience, it's also an innovative leader. Last year the company introduced the world's first global LTE chip known as the RF360 Front End Solution. As telecom companies around the world have developed their 4G LTE networks each has been reliant on its own unique LTE band, thus requiring smartphone developers to introduce mobile devices that would read that specific band in each region. Qualcomm's RF360 can combine those bands upfront, virtually eliminating the need for an RF chip in newer smartphones, and reducing the need for smartphone developers to produce different model mobile devices for different regions.

Of course, Qualcomm isn't without its own set of risks. Commoditization and eventual connectivity competition could threaten Qualcomm's margins. In addition, infrastructure upgrade cycles are exactly as they sound: cyclical. This means advanced wireless countries go through peaks and troughs where Qualcomm's growth can wane. In Qualcomm's second quarter, for instance, it delivered just 4% sales growth, its weakest year-over-year growth in four years.

Yet Qualcomm's global opportunity is still enormous considering that so few emerging market countries have even saturated 3G, 4G, or 4G LTE capabilities. China Mobile (NYSE:CHL) launched its 4G or 4G LTE network this year, and this should play right into Qualcomm's hands as a major components supplier for the iPhone.

With a dividend that's grown by 500% over the trailing decade, a current yield of 2.1%, and a forward P/E of 14 with a long-term growth rate that should average between 8% and 10%, I would suggest this is a dividend stock you can consider adding to your portfolio right now.

Alliance Fiber Optic Products (NASDAQ:AFOP)
If you're willing to trade in a smaller yield in the interim for a faster revenue growth rate, yet not give up any long-term dividend growth potential, then I'd steer you toward taking a closer look at small-cap fiber-optic component producer Alliance Fiber Optic Products.

Some of you are probably not going to be comfortable with the fact that Alliance Fiber Optic is just a $300 million company and has minimal Wall Street coverage – and that's OK. When in doubt you always have a company like Qualcomm to consider. But, for those of you looking for a double-digit growth rate, then Alliance Fiber Optic is a company you'll want to monitor.


Source: Barta IV, Flickr

The primary growth driver at the moment for Alliance Fiber Optic is China. As the company's CEO Peter Chang noted in its first-quarter results, "While data bandwidth demands continue to increase and the next growth cycle in the fiber optics industry is emerging, we are encouraged by the prospects of business growth in the coming years, and with the progress we made serving our customers and extending our product technology in recent quarters." Chang's words appear to indicate that the infrastructure upgrade cycle in China is just starting for Alliance Fiber Optic. And, as a quick reminder, it reported record quarterly revenue of $24.9 million in Q1, up 105% from the prior-year period.

For those who think that Alliance Fiber Optic's Q1 could be a one-hit wonder, think again. With the exception of the fourth-quarter of 2013, Alliance Fiber Optic has trounced Wall Street's expectations in each of the past nine quarters. On a forward basis Alliance Fiber Optic has double-digit top-line growth potential for at least the next couple of years and is valued at less than 13 times forward earnings.

On the dividend front Alliance Fiber Optic offers a payout just once a year. It paid a dividend in 2013 of $0.15. Some might view this 0.8% yield as hardly worth their time, but you should also consider that there's more than $51 million in cash and no debt backing this payout, and that the company's share price is up about 200% since its initial payout in 2012, which has worked to push its yield lower, yet has boosted shareholder value. In other words, it's highly likely this dividend is going to head higher, and it would be wise for investors to get this company on their watchlist.

One dividend in this sector you may want to avoid
In contrast to the aforementioned two communication equipment stocks which are seeing robust growth and may continue to see improvements in their annual payouts, I would suggest putting the brakes on the following dividend-paying stock.

Ericsson Hq

Source: Ericsson

Ericsson (NASDAQ:ERIC)
All told Ericsson surprised investors in a good way last week with better-than-expected profits in the second quarter led by growth in the Middle East, China, and India markets. Ericsson, despite a 1% decline in year-over-year revenue, managed to boost its gross margin by 400 basis points to 36.4% and modestly topped Wall Street's EPS estimates.

But what growth it is seeing in emerging markets regions is being trumped by weakness in its North American operations as well as the potential that a Ukraine-Russia political escalation could negatively impact its networking segment. Even its higher growth Middle East and Africa region came with a warning that political strife could slow its growth potential in coming quarters.  Another way to view this data is that Ericsson's most mature markets – and where it gets the bulk of its revenue – aren't growing that quickly if at all, while it's emerging market opportunities, which account for a much smaller piece of the pie, could grow quickly, but may also run into unforeseen political issues.

The end result is that we're left with a company that has no real top-line growth and is reducing its administrative expenses and research and development costs in order to give investors the impression that margins are moving in the right direction. Cost-cutting works temporarily to inflate EPS, but it's not a long-term solution to driving organic growth.

Ericsson's payout of 3.7% might seem tempting and its forward P/E of 14 may look like a dangling carrot on a stick, but its projected three-year compounded revenue growth forecast of less than 3% leaves a lot to be desired and allows me to easily suggest that income investors look elsewhere.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Apple. It also owns shares of Qualcomm and recommends China Mobile. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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