Do telecom stocks have a future?

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rgs92
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Re: Do telecom stocks have a future?

Post by rgs92 » Sat Nov 11, 2017 11:10 am

I think that if you *do* buy some stocks for dividend income, you need to commit to never selling them and just taking the dividends and ignoring the price.
In that sense, they are like buying a bond, just one with a maturity date that is beyond your lifetime.
Never expect to sell at a profit.

Of course there is more risk than a good, solid gov't bond since the dividend amount per share may be lowered, or the company could go out of business, or taken over (causing the dividend to change).

But that's the risk you take for a plump yield.

But unlike a regular stock purchase, if the share price goes down, it should not matter to you. Just like a single bond. If rates rise and the bond value drops, it is no concern for you, as it was never meant to be sold. It's a matter of intentions.

[Sorry, I guess I went tangential from my own original question. Apologies. But it was on my mind since a lot of people do own telecom stocks with this in mind. And it is a very frequent subject here.]

avalpert
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Re: Do telecom stocks have a future?

Post by avalpert » Sat Nov 11, 2017 12:03 pm

rgs92 wrote:
Sat Nov 11, 2017 11:10 am
I think that if you *do* buy some stocks for dividend income, you need to commit to never selling them and just taking the dividends and ignoring the price.
In that sense, they are like buying a bond, just one with a maturity date that is beyond your lifetime.
Never expect to sell at a profit.
That doesn't make them like a bond - that makes you ignorant to indicators that the dividend may not be sustainable and poof your expected income is gone. Essentially that is like saying you should ignore credit risk when you buy high-yield bonds and just assume the yield will always be there. It's also called whistling past the graveyard.

But yes, we can redirect this discussion to any of the threads that delves into why dividend investing is a bad strategy.

vested1
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Re: Do telecom stocks have a future?

Post by vested1 » Sat Nov 11, 2017 1:12 pm

rgs92 wrote:
Sat Nov 11, 2017 11:10 am
I think that if you *do* buy some stocks for dividend income, you need to commit to never selling them and just taking the dividends and ignoring the price.
In that sense, they are like buying a bond, just one with a maturity date that is beyond your lifetime.
Never expect to sell at a profit.
But unlike a regular stock purchase, if the share price goes down, it should not matter to you. Just like a single bond. If rates rise and the bond value drops, it is no concern for you, as it was never meant to be sold. It's a matter of intentions.
It seems to matter to my retired friends when their portfolio balance drops precipitously because they are overweight in a single stock , even when they get those fat dividend checks. Suddenly, their back of the envelope calculations of not running out of money in retirement seem inaccurate.

This is one of the main disconnects for those who advocate dividend investing. You seem to be trying to convince yourself of your argument that a high yield stock is equivalent to a bond. The companies who offer these high yields would like to encourage that thinking.

It reminds me of the divergent attitudes between myself and some of my friends while working for telecom megacorp. Most chose to have their dividends distributed, even though they didn't need the money, whereas I always reinvested them. They considered dividends to be a bonus check. At the request of one of my friends, we sat down recently to go over his impending retirement and his portfolio. We both shared our balances and positions (we're like brothers, only closer). He was amazed that, even though we had been invested in the same things and had contributed identical amounts, that my balance was so much larger. The difference was dividends, which allowed more growth from a higher balance, rather than depleting the balance of thousands every year during a very long career.

I also had several friends who didn't understand dividends, even though they were taking them, who bragged that they were getting over by piling into the company stock on the day before the X dividend date, then getting back out after their check was deposited. They didn't get that they were taking more out of their 401k by doing this.

The same is true of dividend investing for the sole purpose of income, while ignoring the stock price and thus the portfolio balance. A larger balance gives you more options, period. It allows you to make decisions you wouldn't otherwise be able to make. Dividends are taken from the value of the stock; the higher the yield, the more is taken from the value. The most critical aspect of having large positions in a few high yield stocks, rather than broadly based index stock funds with a mixture of indexed bond funds, is of course, the extreme risk to the balance of your portfolio.

Valuethinker
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Re: Do telecom stocks have a future?

Post by Valuethinker » Sat Nov 11, 2017 1:35 pm

rgs92 wrote:
Sat Nov 11, 2017 11:10 am
I think that if you *do* buy some stocks for dividend income, you need to commit to never selling them and just taking the dividends and ignoring the price.
In that sense, they are like buying a bond, just one with a maturity date that is beyond your lifetime.
Never expect to sell at a profit.

Of course there is more risk than a good, solid gov't bond since the dividend amount per share may be lowered, or the company could go out of business, or taken over (causing the dividend to change).

But that's the risk you take for a plump yield.

But unlike a regular stock purchase, if the share price goes down, it should not matter to you. Just like a single bond. If rates rise and the bond value drops, it is no concern for you, as it was never meant to be sold. It's a matter of intentions.

[Sorry, I guess I went tangential from my own original question. Apologies. But it was on my mind since a lot of people do own telecom stocks with this in mind. And it is a very frequent subject here.]
Just from an equity investor viewpoint- -straight CFA stuff.

There is this metric Dividend Cover = Dividend Per Share/ Earnings Per Share (the inverse of the payout ratio which measures what percentage of earnings are paid out to shareholders) - measured in times (usually written "x" and taken to the first decimal place).

If Div cover , 1.0x then the company is depleting the Retained Earnings number on the balance sheet. Basically it will reach the point where it has to stop paying out dividends (legally you need distributable reserves to pay a dividend). The Board may be able to ride this for a year or two, but there will be a need to cut the dividend.

If cover is 2.0x or above then the company can probably afford to grow the dividend. Basically for every $1.00 of earnings, 50 cents is paid out as a dividend, and there's still 50 cents to reinvest in the business, thus growing the retained earnings number (and also the cash). Businesses that do not reinvest in themselves tend to disappear over time-- and that's especially true in the technology-media-telecoms area (but not only, industrials are the same).

(EPS is also a manipulable number. Things like expensing vs. capitalizing certain items can have a big impact on reported profits).

With companies like regulated utilities, cover can be 1.5x, 1.4x and we don't get too worried about a dividend cut. Telecoms is not a regulated utility any more.

The problem with high yielding stocks (perhaps like AT & T) is that the market can see the cut coming. It thus depresses the price of the stock, and that gives it a high dividend yield (dividend per share/ price). However other factors, such as technology or market change, are depressing future earnings growth.

We should not be surprised then, when the dividend is subsequently cut. Industries with a "distaste" factor, like Defence or Tobacco, especially Tobacco, can avoid this problem - the share prices are depressed for other reasons and the underlying cash generation remains robust. (Defence you have these long term contracts plus constant industry consolidation).

(Companies may prefer to buy back shares to return capital to shareholders. Theory (Modigliani Miller) tells us they should be equivalent. Warren Buffett at Berkshire Hathaway in particular:

- buying back shares enhances EPS (which often triggers executive compensation bonuses)
- buying back shares reduces the cash cost of future dividend commitments
- it may be more tax efficient for investors (capital gains v. dividends))


For that reason there are "dividend achiever" funds focusing on companies, often not paying high yields, but where they have consistently held or grown their dividends.

In no sense is a dividend like the coupon on a bond. It's not guaranteed. It doesn't have to be paid. The Board may decide it is imprudent to pay it. At best, it's a crude measure of Value in a stock (there are better ones).

If you want to chase income from your portfolio, you are better off with a "Dividend Achiever" fund. Although your yield may be lower, there's at least a behavioural bias that the companies in the portfolio will continue to pay and even grow the dividend.
Last edited by Valuethinker on Sat Nov 11, 2017 1:40 pm, edited 1 time in total.

Valuethinker
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Re: Do telecom stocks have a future?

Post by Valuethinker » Sat Nov 11, 2017 1:37 pm

brad.clarkston wrote:
Fri Nov 10, 2017 10:46 am
Valuethinker wrote:
Fri Nov 10, 2017 6:17 am
I would reckon 20-30% of the posters here either work in, or have retired from, tech and telecom related industries.
I mean absolutely no offense by this but the current stage in the telco business has nothing to do with the ones from 10-15 years ago. Two of the four big ones are 80%-to-85% owned by private companies (Softbank & Deutsche Telekom) and AT&T is nearly back to full monopoly status in content delivery with only the DOJ trying to stop them. The days of employee's hanging on every stock tic is long past as our bonuses and pay increases have no bearing on ticker price.
Senior management will be incentivized by the Softbank or DB Telekom share price performance.

And everyone else will have profit targets. Similarly re PE/ LBO owned businesses.

AT & T may have built up a position in broadband delivery. But don't Americans get a choice of ISP? And there's also the cable companies?
I do agree on selling out of any telco stocks but for different reasons. They are stagnating due to a lack of competition and are transitioning away from there old cores into content delivery and creation so it's strange times at best.
I think we are on a page on that. It's an industry where too much is happening, and it's not clear who the winners will be.

VaR
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Re: Do telecom stocks have a future?

Post by VaR » Sat Nov 11, 2017 11:55 pm

OP, are you looking at specific "telecoms" or all 26 components of the telecom sector?

For reference, here is a breakdown of the Vanguard Telecom Services Index Fund
Alternative Carriers 23.70%
Integrated Telecommunication Services 61.40%
Wireless Telecommunication Services 14.90%

And here are the month-end top 10 holdings:
1 AT&T Inc. 23.4%
2 Verizon Communications Inc. 23.1%
3 Level 3 Communications Inc. 4.5%
4 T-Mobile US Inc. 4.4%
5 CenturyLink Inc. 3.3%
6 Zayo Group Holdings Inc. 2.9%
7 Sprint Corp. 2.9%
8 Shenandoah Telecommunications Co. 2.4%
9 Vonage Holdings Corp. 2.4%
10 Cogent Communications Holdings Inc. 2.4%
Ten largest holdings = 71.7% of total net assets

As a comparison, I did a quick analysis in portfolio visualizer comparing the Vanguard Telecommunications Index Fund, AT&T, and Total Stock Market Index Fund:
https://www.portfoliovisualizer.com/bac ... ion3_3=100

I see no compelling argument that either individual telecoms or the telecom index have had superior risk-adjusted returns compared to a broad market index, nor that they will in the future.

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arcticpineapplecorp.
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Re: Do telecom stocks have a future?

Post by arcticpineapplecorp. » Sun Nov 12, 2017 12:05 am

since you own the stocks in a tax deferred account and there are no tax implications, the only question to ask yourself is:

If you didn't own the stocks you now have, would you go out and buy the same stocks for the same amount of money they're currently worth?

If the answer is no, then you should sell them. If the answer is yes, then you should hold on to them...and buy more. What do you think about that question?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

TonyDAntonio
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Re: Do telecom stocks have a future?

Post by TonyDAntonio » Sun Nov 12, 2017 12:54 am

arcticpineapplecorp. wrote:
Sun Nov 12, 2017 12:05 am
since you own the stocks in a tax deferred account and there are no tax implications, the only question to ask yourself is:

If you didn't own the stocks you now have, would you go out and buy the same stocks for the same amount of money they're currently worth?

If the answer is no, then you should sell them. If the answer is yes, then you should hold on to them...and buy more. What do you think about that question?
I think this is a good question. I've been grappling with retirement income, low bond yields, losing bond fund value in a rising interest rate environment especially when I'm not reinvesting the interest, T and VZ dividend safety and volatility, etc. for two years.

Elbowman
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Re: Do telecom stocks have a future?

Post by Elbowman » Sun Nov 12, 2017 6:20 pm

Why are people discussing industry performance and prospects? One of the biggest reasons stock picking is hard is that it doesn't matter how well a company does in absolute terms, only relative to expectations.

It doesn't sound like there are tax consequences. Total Stock Market will give you more expected return per risk. Sell.

Jeff Albertson
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Re: Do telecom stocks have a future?

Post by Jeff Albertson » Sun Nov 12, 2017 9:13 pm

Forbes cover 10 years ago.
"Nokia - 10 billion customers - can anyone catch the cell phone king?"
https://twitter.com/mikko/status/929740438294204416

Valuethinker
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Re: Do telecom stocks have a future?

Post by Valuethinker » Mon Nov 13, 2017 4:20 am

TonyDAntonio wrote:
Sun Nov 12, 2017 12:54 am
arcticpineapplecorp. wrote:
Sun Nov 12, 2017 12:05 am
since you own the stocks in a tax deferred account and there are no tax implications, the only question to ask yourself is:

If you didn't own the stocks you now have, would you go out and buy the same stocks for the same amount of money they're currently worth?

If the answer is no, then you should sell them. If the answer is yes, then you should hold on to them...and buy more. What do you think about that question?
I think this is a good question. I've been grappling with retirement income, low bond yields, losing bond fund value in a rising interest rate environment especially when I'm not reinvesting the interest, T and VZ dividend safety and volatility, etc. for two years.
The Boglehead answer is you have a Safe Withdrawal Rate, and you manage your reductions in your portfolio in the most tax efficient manner.

In other words you don't care whether it is interest, dividends or capital gains, or just reduction of capital.

Although people talk about SWR of 4.0% here, I believe 2.5% is closer to the safe level given current likely capital market returns (interest rates, equity performance etc). If you have a need for greater than that, I suggest you annuitize at least some of your wealth-- thus ensuring you cannot outlive your capital (and importantly your spouse-- those of us who are male face the possibility of our spouses living into their late 90s; there are very few men over 90 compared to the number of women). We are of course talking only SPIA here.

Unfortunately inflation-linked annuities are rare in the USA-- very few insurers offer them. However US Social Security is relatively generous for a state scheme, and is inflation linked (payments rise with CPI-U).

donfairplay
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Re: Do telecom stocks have a future?

Post by donfairplay » Mon Nov 13, 2017 7:13 am

CyclingDuo wrote:
Sat Nov 11, 2017 8:34 am
TonyDAntonio wrote:
Fri Nov 10, 2017 10:07 pm
I didn't buy T and VZ for higher returns than the total stock market that's what the other 75% of my portfolio is for. I bought them to generate an income stream greater than the total bond fund. And I believe that they've done that over the time frame. I'm not trying to convince anyone else to do this and I'm not saying it is without risk. I'm coming to grips with the risk.
Seeking Alpha's "Fill The Gap Portfolio" that they set up at the end of 2014 just added more shares of T due to the recent stock price and yield. It also holds VZ in the portfolio:

https://seekingalpha.com/article/412227 ... -help-will

Image

https://seekingalpha.com/article/411853 ... iral-worry
864 shares of CenturyLink (CTL) would have gained $1,866.24 annually in dividends according to that table.

864 shares purchased at the end of 2014 (I used Dec 26, 2014 from google finance) would have cost $34,974.24 at $40.48 per share.

Today those shares would be worth $13,374.72 at $15.48 per share.

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CyclingDuo
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Re: Do telecom stocks have a future?

Post by CyclingDuo » Mon Nov 13, 2017 10:16 am

donfairplay wrote:
Mon Nov 13, 2017 7:13 am
CyclingDuo wrote:
Sat Nov 11, 2017 8:34 am
TonyDAntonio wrote:
Fri Nov 10, 2017 10:07 pm
I didn't buy T and VZ for higher returns than the total stock market that's what the other 75% of my portfolio is for. I bought them to generate an income stream greater than the total bond fund. And I believe that they've done that over the time frame. I'm not trying to convince anyone else to do this and I'm not saying it is without risk. I'm coming to grips with the risk.
Seeking Alpha's "Fill The Gap Portfolio" that they set up at the end of 2014 just added more shares of T due to the recent stock price and yield. It also holds VZ in the portfolio:

https://seekingalpha.com/article/412227 ... -help-will

Image

https://seekingalpha.com/article/411853 ... iral-worry
864 shares of CenturyLink (CTL) would have gained $1,866.24 annually in dividends according to that table.

864 shares purchased at the end of 2014 (I used Dec 26, 2014 from google finance) would have cost $34,974.24 at $40.48 per share.

Today those shares would be worth $13,374.72 at $15.48 per share.
Not to spend too much time defending the portfolio, as it is not mine. It is something Seeking Alpha put together as a dividend income investment vehicle to "Fill The Gap" for a retired couple. It's a given that some stocks within a portfolio will be down as well as up in a given portfolio. You highlighted one of the stocks within a current 21 dividend paying stock portfolio that encompasses many sectors. The original portfolio of 15 stocks had the goal to avoid what you bring up - single stock risk. It also had goals to utilize excess dividend beyond the $21,200 throw to diversify into additional names. 6 names have thus far been added.

Diversification Helps Mitigate Risk to the Entire Portfolio

To reduce the risk that any one company could severely damage the enterprise by cutting or eliminating the dividend, we have begun this portfolio with 15 names, diversified as to both number and industry. To illustrate, if one company completely eliminated its dividend, and the income derived represented 1/15th of the total income, or 6.6%, it would represent a pay cut of about $1400.

On the other hand, if we experienced 6.6% growth in the portfolio's overall income that year by virtue of dividend increases by the 14 other companies, we might come out even that year and suffer no perceptible pay cut.

As dividends accrue, additional names will be added to this portfolio to add additional diversification. When the portfolio reaches about thirty to forty names, additional dividends accrued will be reinvested into the existing names of the portfolio on an opportunistic basis.


View the past 2 years...

Current Portfolio value is: $532,543 as of this morning. $31,160 dividend throw this year.
Original Purchase value: $411,604 at the end of 12/14 when it was "started". $21,245K dividend throw anticipated.

Original goal of this particular portfolio was to provide a dividend throw of $21,200 to "fill the income gap" for a retired couple that required an annual income of $50K. The remainder of income for that couple comes from Social Security.

So far, the goal of meeting that $21,200 income gap and providing additional dividend throw to purchase additional names has been met in 2015, 2016, and now 2017. I would imagine share price depreciation as well as appreciation in individual names will continue - such as the one you highlight with regard to the depreciation in Century Link. At the very least - be it via index fund investing, or individual stock investing - the Century Link example highlights the risk of a single stock.

Original article and premise of setting up a portfolio to fill the income gap for a retired couple can be found here:

https://seekingalpha.com/article/277963 ... -portfolio

3funder
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Re: Do telecom stocks have a future?

Post by 3funder » Mon Nov 13, 2017 5:02 pm

The telecommunications sector is capital-intensive, and telecoms don't excite me. If I were to invest in individual stocks that pay steady, healthy dividends, I'd much rather own shares of Johnson & Johnson.

rgs92
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Re: Do telecom stocks have a future?

Post by rgs92 » Mon Nov 13, 2017 10:03 pm

Again, thanks to everyone for all this info. I guess their is something to be learned in the GE 50% dividend reduction today. Cheers to all the commenters here.

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