Investments to Avoid

I'm fresh from a visit to Monticello, Thomas Jefferson's Charlottesville, Va., estate. It's a very interesting place to see, and I highly recommend it. But if there's one thing I learned more than anything else, it's this: I'm exceedingly lazy.

I used to pride myself on being an avid reader, since my job requires it and all. Apparently, however, I'm a complete imbecile compared to Thomas Jefferson. In his spare time -- between authoring the Declaration of Independence and serving as president of the United States -- he had several inventions credited to his name, was a self-taught architect, and learned seven languages. I'm not sure I could name seven languages.

Perhaps my shortcoming is at least partly a result of my need to avoid things -- you know, nasty stuff like work and, well, work. But, my friends, my need to avoid things might just come in handy for you. It so happens that there is an area of investing that you might want to avoid right now, and that's the subject that I have brewing on the stone hearth for today.

Telecom trouble
Some once-safe dividend havens could quickly become dividend sinkholes in this brave new world of ours. As the risk of volatility in stocks in general increases, so the world of dividend-paying investments has also become a more perilous place to tread.

While dividends still offer a certain degree of safety to nearly any investment, some old dividend truths aren't quite so true anymore, thus potentially leading you into money-losing trouble.

Today, we'll dispel the notion that the telecom industry is still a compelling choice for dividend seekers. Truth is, you must now be extremely selective in this sector when searching for dividend love. Technology has changed this field in ways no one imagined just five or 10 years ago; this doesn't bode well for the Bells that have spent billions building out their networks, which are largely no longer required for startup competitors to reach their customers.

It's partly for this reason that I sold my own position in BellSouth (NYSE: BLS  ) several months ago. I've done well with the investment. However, I don't see a convincing risk/reward trade-off, for the firm or the sector as a whole going forward.

Gone are the days when the telecom monopolies could sit back and rake in huge profits from customers who were stranded without them. I believe voice over Internet protocol (VoIP) will dramatically change the way people view telecommunications in this country. The cellular phone, along with providers such as Nextel (Nasdaq: NXTL  ) , has already done this to some extent, but VoIP is going to be the final blow to the old ways.

This service allows customers to make calls with a normal wireline or portable home telephone via broadband Internet, and the quality is now nearly identical to normal phone service. Well, you're thinking, so what? So VoIP is almost the same quality as regular phone service, big deal.

It is, in fact, a big deal because VoIP phone service tends to cost just a fraction of ordinary wireline telephone service, and it's offered by a rapidly increasing number of upstarts. Of course, after largely ignoring the technology, the big boys, such as AT&T (NYSE: T  ) and Qwest (NYSE: Q  ) , are trying to jump on the bandwagon, but their services are still far costlier than that of the upstarts and they have virtually no quality advantage in this arena.

I speak with some personal experience here. I recently dropped my wireline home phone service with Verizon (NYSE: VZ  ) to go with a VoIP provider. I had a single home line with Verizon with all the bells and whistles, including an unlimited long-distance package that cost me a whopping $78 a month.

Now, I have both a home line and a fax line for my home office, many more bells and whistles, unlimited long distance in the U.S. and Canada, and access to very cheap international rates. I pay $36 a month. I've noticed very little quality difference between my old wireline phone and the new service, and I use my existing high-speed cable Internet connection, which is always on, to place my calls. In the rare case where my Internet service goes down, I can use my cell phone.

This service is just too easy and too inexpensive not to catch on and, again, the established phone companies are going to have a very hard time competing on price. Indeed, even in this new space, a price war is imminent. My service recently notified me that my monthly cost would go down by $5 (included in the above price). When was the last time that happened with your wireline service?

The fact is that, even if the Federal Communications Commission steps in to regulate this new technology in a way that favors the Bells, these companies are still facing pressure on all sides. The cable companies, such as Cox Communications (NYSE: COX  ) , have better infrastructure and closer relationships with customers who already depend on them for digital television services. New telecom projects like Fiber-to-the-Home (FTTH) -- viewed by some as the high-speed-data savior of the Bells -- will cost billions and take years upon years to complete.

The Foolish bottom line
The phone companies are in trouble. I predict that home phone service with long distance through VoIP technology will someday be virtually free, which could go a long way toward destroying the very backbone of the cash-generating power of the Bells.

Mind you, there are exceptions and companies that will see far less competitive pressure in the near term -- rural providers such as past Income Investor selection and 20% performer Alltel (NYSE: AT  ) come to mind -- and the death rattle could be very slow in coming for these still-powerful firms. However, the Bells are not the dividend divas they once were. Though the yields in the sector can be very tempting, I would resist the urge to place this call.

Mathew Emmert would place his calls with a tin can and some string if he didn't have to suffer on quality. He's the author of the Fool's dividend-stock newsletter, Motley Fool Income Investor -- try itfree for 30 days. He doesn't own shares in any companies mentioned in this article. The Fool has a hardworkingdisclosure policy.


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