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Calling Big Dividends and Great Growth Potential

By Selena Maranjian - Nov 16, 2012 at 9:22PM

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Some of these companies yield more than 9%!

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some telecom services companies to your portfolio, the Vanguard Telecom Services ETF ( VOX 1.06% ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.19%. (Vanguard is known for its low fees.) It yields about 2.8%, as well.

This ETF has performed well, beating the world market handily over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why telecom services?
A big smartphone revolution is under way, with tablets and other new electronic devices proliferating, as well. All this bodes well for the telecom industry that serves these items that many of us can no longer live without.

More than a handful of telecom companies had strong performances over the past year. Wireless broadband provider Clearwire (NASDAQ: CLWR) gained 18%, for example. It made some regrettable bets on a WiMAX 4G standard, and also has a hefty debt load (recently more than $4 billion) that has been growing in the past few years. The company is looking to sell some of its spectrum to help pay it down. On the plus side, it renegotiated a deal with Sprint Nextel ( S ) and is making sure its new LTE standards are compatible with offerings in China. The company's surging share count is worrisome, though, as it dilutes the value of existing shares.

Plenty of telecom companies didn't do as well last year, but could see their fortunes change in the coming years. Windstream ( WINMQ ), for example, shed 23% over the past year, recently hitting a 52-week low, while fellow rural telecom services provider Frontier Communications ( FTR ) lost 9%. Windstream recently lowered its projections and, with its free cash flow less than its payout, its massive 12.2% dividend yield seems threatened. Meanwhile, revenue has been growing, while net income has been shrinking.

Frontier posted a reasonably solid quarter recently, with revenue coming in a bit higher than expected, though free cash flow shrank. It, too, offers a tantalizing dividend yield, above 9%, though, as my colleague Rick Munarriz reminds us, steep yields bear close watching.

Level 3 Communications ( LVLT ), long burdened with a mountain of debt, shrank by 10% over the past year. (It dropped by as much as 10% in a single day last month, too, after reporting disappointing earnings.) The company is expanding its services around the world -- for example, boosting its video broadcasting in Latin America. Many investors are steering clear, though, not liking its falling free cash flow or lack of a dividend. Even analysts are split, with some liking its increased bookings, and others seeing it headed downward.

The big picture
Demand for telecom services isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Sprint Corporation Stock Quote
Sprint Corporation
S
Windstream Holdings, Inc. Stock Quote
Windstream Holdings, Inc.
WINMQ
Frontier Communications Corporation Stock Quote
Frontier Communications Corporation
FTR
Level 3 Communications, Inc. Stock Quote
Level 3 Communications, Inc.
LVLT
Vanguard World Fund - Vanguard Communication Services ETF Stock Quote
Vanguard World Fund - Vanguard Communication Services ETF
VOX
$134.90 (1.06%) $1.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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