The telecommunications sector plays host to a range of stocks that pay substantial dividends and trade at earnings multiples that are significantly below the broader market average. It's also true that many companies in the space don't offer much in the way of growth potential. But some telecoms combine low P/E values and high yields with the potential to benefit from far-reaching trends that could pave the way to market-beating gains and continued payout growth.
5G is the next major evolution in wireless internet technology. It will dramatically expand the capabilities of wearables and connected cars, and work as the backbone for a wide range of Internet of Things (IoT) devices and services. AT&T (T -1.24%) and Verizon Communications (VZ -0.03%) are two top 5G stocks in the telecom space, and each company trades at less than 12.5 times forward earnings estimates and boasts a dividend yield that's more than double the market average. For investors looking for high-yield U.S. telecoms, they stand out as the best plays in the space.
AT&T trades at just 10 times this year's expected earnings and has a 5.5% dividend yield backed by a 36-year history of consecutive annual payout growth. The company operates the nation's second-largest mobile wireless network, its largest pay TV network through its DirecTV subsidiary, and Time Warner -- one of the world's largest media businesses.
Internet connectivity will only become more and more central to everyday life, and high-performance 5G networks should improve AT&T's pricing power in the mobile wireless space. Adding wireless service connections outside of the mobile space has emerged as a significant performance driver for the company, and 5G packages for wearables, smart cars, and other connected devices should be a substantial positive catalyst over the next decade.
There's also a good chance that demand for entertainment content will continue rising, and the integration of the Time Warner unit gives AT&T ways to capitalize on streaming distribution and interactive entertainment that also fortify its mobile wireless business through bundling.
The company will be able to pair 5G service with its upcoming HBO Max streaming service. And Time Warner's movie, television, and video game production studios position AT&T to have strong content for virtual reality and augmented reality platforms that could get a big boost from next-gen network technology. Combined strength in content and distribution also bodes well for its digital advertising business.
The biggest drag on AT&T's performance will likely continue to be subscriber erosion at DirecTV, but it's still putting up strong free cash flow (FCF), and growth for its content business should help offset declines for satellite TV. The company generated enough FCF over the trailing 12 months to cover its forward dividend nearly twice over, and it's also been making some substantial progress on paying down its debt. With its big dividend, 5G tailwinds on the horizon, and an entertainment division that still looks underappreciated, AT&T is a rock-solid long-term play.
Verizon operates the largest and best-rated mobile wireless network in the U.S., and it's another standout play for investors looking to benefit from 5G momentum while collecting substantial dividends along the way. The stock trades at roughly 12 times this year's expected earnings and has a 4.2% dividend yield. The company has a 13-year payout growth streak, and its payout ratio is still quite safe at just 59% of trailing free cash flow.
Like AT&T, Verizon should benefit from increased pricing power with the rollout of its 5G network and have the opportunity to add new service connections across a wide range of new connected devices. Verizon has made substantial investments in connected-car and IoT platform service technologies, and its massive subscriber base puts the company in good position to bridge existing customers over to new service plans for additional devices.
2020 will likely see the company more focused on ramping up its 5G home internet offerings, an initiative that could help bridge its service into new markets, and it stands as one of the most likely winners as mobile wireless coverage expands. Verizon has already launched its 5G mobile wireless network in select cities, and its coverage rollout will accelerate as more devices are released that support the next-gen network technology.
Compatible handsets will likely start to go mainstream in 2020, with expectations that Apple and Samsung will launch high-end smartphones that support 5G this year. Some phones in Samsung's Galaxy Note 10 line already offer limited 5G, but this year's phones are expected to support a wider range of frequencies and offer superior performance.
Mobile-wireless rival AT&T offers a bigger dividend, but Verizon has less exposure to the declining pay TV business and is seeing less pressure from cord-cutting trends. On the other hand, Verizon doesn't have much growth potential in the entertainment space compared with AT&T. Investors who are concerned about cord-cutting and don't see much appeal in the Time Warner business will likely find Verizon to be the better play, but both companies pay great dividends and are poised to see tailwinds from 5G.