Dividend Growth Investing – Telecommunications Stocks

There are presently 10 GICS sectors with one more being added later this year, REITs, which brings the number of sectors we need to evaluate to 11. The sector with the least amount of choices for dividend growth investing (DGI) is telecommunications. At some point in time when landlines were common place, there may have been more companies playing in this space. In fact, you might expect to see the people behind GICS decide to remove this sector altogether. Until that happens, we will want to hold at least one stock from this sector. As it turns out, there is just one stock in the telecommunications for us to invest in.

First, let’s take all stocks in the telecommunications sector that have paid and grown dividends for 20 years or more. Here’s what that list looks like:

Telecommunications Stocks

We exclude Telephone & Data Sys. because their market cap falls below our $10 billion threshold leaving us with just AT&T (T) which is a popular holding for DGI investors. Let’s take a look at their Q-Score:

T Q-Score

We like to see Q-Scores above 15 for any stock, but would expect that some defensive sectors with lower dividend growth will have lower Q-Scores. Since telecommunications is a defensive sector, we see low dividend growth and as a result they are penalized for it. We also see that they receive very few points for international sales since at the moment their international segment accounts for just 3% of total revenues.

T Fundamentals

Since we want to have at least 1 stock per sector, we’re going to add T to our portfolio. As it turns out, we’ve been accumulating T for a well with our regular monthly purchases seen below:

T PurchasesIn order to reach our target position size of $13,300 in the next 24 months (our timeline to become fully vested), we’ll need to start contributing $190 per month to T. One problem with T is that their dividend has come under pressure lately as seen in the below chart:

T Financials

The dotted red line above shows a payout ratio of 100% which means every single penny of net income is paid out to shareholders in the form of dividends. So how can you have a payout ratio above 100% as T does? Where does the money come from to pay dividends? As we discussed before, companies with declining net income can pay dividends using cash or debt. In this case we see T is paying dividends using debt. With interest rates at all-time lows, taking on low fixed-rate debt to pay dividends while investing the money in the Direct TV acquisition (as an example) can make economic sense in the long run. Let’s hope they never stop growing that dividend because should that happen, we automatically sell our position 10 business days following the announcement. We would then take another look at the telecommunications sector but as we saw earlier, there are no viable replacements. Instead, we’d look to replace
T with a high Q-Score stock in another sector, just not consumer staples as we’re at our limit of 5 stocks in any given sector.

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