3 5G Stocks That Also Pay Rock-Solid Dividends

Many wireless carriers have been expanding their fifth-generation (5G) networks, which can transfer data up to 100 times faster than 4G networks, over the past year. The growth of that market could pave the way for breakthroughs across the mobile, Internet of Things (IoT), automation, analytics, and artificial intelligence markets.

As a result, the global 5G services market could grow at a whopping compound annual growth rate of 43.9% between 2021 and 2027, according to Grand View Research. Investors who want a piece of that action have plenty of stocks to choose from, but only a handful of those companies pay dividends.

Let's take a closer look at three companies that will profit from the growth of the 5G market while paying decent dividends to patient investors: Ericsson (ERIC 0.35%), Skyworks Solutions (SWKS 0.22%), and Qualcomm (QCOM 2.19%).

Image source: Getty Images.

What does the 5G market means to these three companies?

Before we discuss these companies' dividends, we should see how the 5G market's secular growth will boost their revenues and earnings.

Ericsson controlled 14% of the world's telecom equipment market last year, according to Dell'Oro Group, putting it in third place behind Huawei's 27% share and Nokia's (NOK +3.04%) 16% share. Ericsson is arguably the strongest of the top three players.

Huawei faces blacklists and sanctions. Nokia is dealing with sluggish network upgrades, tough competition in China, and a recent CEO change. Ericsson isn't struggling with any management issues, it's growing faster than Nokia in China, and it's already signed 116 commercial 5G agreements or contracts with unique operators worldwide.

Skyworks produces wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. Its top customer is Apple (AAPL 1.93%), which accounted for 51% of its revenue last year. Apple's recent launch of the iPhone 12, its first 5G smartphone, will inevitably boost Skyworks' sales.

Image source: Getty Images.

But that's not all: Skyworks expects industry-wide front-end chip revenue to hit $25 per 5G smartphone, up from $18 per 4G device and $8 per 3G device. Those content share gains, along with Skyworks' expansion into non-smartphone markets, make it a top 5G play.

Qualcomm is the world's top manufacturer of wireless modems, which it integrates into its industry-leading Snapdragon system on chips (SoCs) for mobile devices. It also owns the world's largest portfolio of wireless patents, which entitles it to a cut of every smartphone sold worldwide.

Those two core businesses make Qualcomm the unofficial gatekeeper of the 5G market. Most of the world's 5G smartphones will be powered by Qualcomm's SoCs, and every original equipment manufacturer (OEM) -- even those that don't use Qualcomm's chips -- will need to pay it 5G licensing fees.

How healthy are their dividends?

When investors research a company's dividend, they should focus on three things: the company's cash dividend payout ratio, or the percentage of its free cash flow paid out as dividends over the past 12 months; its forward dividend yield; and its track of record of annual dividend hikes.

Source: Yahoo Finance, Dividend.com.

Ericsson pays semi-annual dividends, which are set every year based on its profits instead of regular year-over-year increases. Skyworks and Qualcomm both pay quarterly dividends.

Qualcomm finally raised its dividend earlier this year after a two-year freeze. During that time, it prioritized big buybacks over dividends after it abandoned its takeover of NXP and narrowly fended off a hostile takeover attempt by Broadcom.

Skyworks has consistently raised its dividend every year since its introduction in 2014. All three companies have plenty of room to raise their dividends in the future, and none of them suspended their payouts during the COVID-19 crisis.

Are these stocks cheap relative to their growth?

Investors should take analysts' forecasts with a grain of salt, but all three companies are expected to generate solid revenue and earnings growth next year as the 5G market expands. All three stocks are also reasonably valued relative to those near-term forecasts, but Ericsson looks the cheapest:

Source: Yahoo Finance, Nov. 12.

The key takeaway

Ericsson, Skyworks, and Qualcomm probably won't impress serious income investors, but their dividends present a nice bonus for investors who are willing to patiently wait for the 5G market's tailwinds to kick in.