Telecom: The Right Call for Income?

04/15/2014 9:00 am EST

Focus: STRATEGIES

Jack Bowers

Editor, Fidelity Monitor & Insight

Could telecom stock become the new utilities for income-oriented investors? asks Jack Bowers, editor of Fidelity Monitor & Insight.

It’s getting cheaper and easier for businesses and households to make their own electricity—an evolving situation that may eventually cause demand for utility power to slip into permanent decline, eventually making it more difficult for electric utilities to grow their dividends.

Fortunately, for those who prefer a durable source of stock dividends, the telecommunications sector is beckoning.

It’s been a rough road over the last decade, but the carriers appear to be successfully navigating the transition from landlines and talk time to wireless data. Revenue from data plans is now offsetting declines in other areas.

Furthermore, by moving away from contracts, and by financing cell phone purchases outside of the normal monthly wireless bill, consumers appear more receptive to taking on the cost of a smartphone data plan.

The upshot is that, despite the high capital costs of keeping up with surging data demand, telecom dividends appear to have more room to grow as tablets and smartphones displace desktop PCs in the coming decade.

Will there ever be any low-cost competition for wireless data? Free Wi-Fi is already available at many fixed locations. But it doesn’t work when you are on the move, and there are often complications obtaining passwords, and problems getting it to work with mobile devices.

The wireless carriers have invested a huge amount of money creating a convenient system that works in most domestic locations. Once they solve their data congestion problems it will be all but impossible for a new competitor to deliver a similar service at a lower price.

Those cell towers may not look like transmission lines, but from the standpoint of a business model, they appear equally robust.

Bottom line, dividends from the telecom sector may ultimately prove to be a better bet than those from electric utilities.

To that end, this month we have upgraded Fidelity Select Telecommunications (US:FSTCX), Fidelity VIP Telecommunications (US:VFTELIV), and Fidelity MSCI Telecommunications Services ETF (US:FCOM) to a Buy rating.

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