The 5G Revolution Has Arrived. Here’s How Dividend Investors Can Take Advantage of It.
The market has been making new all-time highs almost every other day in a bull market that has been raging for almost 11 years now. But the market indexes are a little deceiving.
The S&P 500 Index is composed of 11 different market sectors (Financials, Energy, Health Care, etc.). Over the past 10 years only three sectors did as well or better than the index. A whopping 8 sectors have underperformed the index, and in many cases by a lot. In fact, eight of the 11 sectors underperformed the S&P 500 index over the past five years, nine underperformed the last three years and eight haven’t done as well as the index over the past year.
The market is being driven by a small minority of sectors. And the undisputed king is Technology. It has been the top performing sector of the market for the past 10-year, five-year, three-year, one-year and three-month periods, in most cases delivering more than twice the return of the market index.
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What’s going on?
People always talk about interest rates and GDP and the like as the driving force behind the bull market. And to a certain extent that’s true. But, make no mistake about it, the high returns are the result of the fact that we are living in an era of exploding technological innovation that provides the jet fuel for this market.
Look around. The world has dramatically changed in the last generation. A generation ago there was no internet, you never sent an email or a text, and you probably didn’t even have a computer or a cell phone. Technological advancement got turbo charged.
Over the past 10 years while the S&P 500 has returned 205%, Amazon (AMZN) has soared 1,700% and Apple (AAPL) is up 1,200%. And those are the big boys. Smaller newcomers have dwarfed those returns. We are in the midst of a technological transformation of the world and the companies involved are soaring to dizzying heights.
But most of the last decade has involved advancements in the same things. Ten years ago we had smartphones and laptops. Social media and streaming was already here. But going forward, new technologies are about to explode onto the scene.
Technology in 5G is brand new and just hitting the market. It will launch the world into another level of the digital age and bring transformative new technologies in self-driving cars, artificial intelligence and smart cities as well as game-changing applications in healthcare and the military. This 5G revolution will likely be a level of technological change we haven’t seen since the arrival of the internet in the 1990s.
Look at the staggering returns for technology stocks over the past 10 years. You ain’t seen nothing yet. Opportunities in technology will explode in the years to come.
While plenty of investors will take advantage, few of them will be dividend investors. Dividend investors usually shun these high-growth stocks in favor of more conservative plays that pay a nice income. But I’ve found a couple of ways dividend investors can participate in the 5G revolution while getting an income at the same time.
2 Dividend Stocks for the 5G Revolution
5G Dividend Stock #1: Qualcomm (QCOM)
Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%, although the smaller area is more profitable and better insulated from competition.
A chip is part of the processor that is essentially the brains of a computer, smartphone or device that controls other devices in the system. These chips are the cutting edge of computer technology and determine the power, speed and function.
Big deal, there’s lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it for the next couple of years at least. It is the undisputed king of the chips that will enable 5G technology. No other chip company is close.
While the first 5G networks were launched last year, they will meaningfully proliferate in 2020 when 5G-enabled phones start hitting the market. Over 75 5G devices are either in the process of being launched or in development. Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment.
Looking forward, Qualcomm estimates that smartphone makers will ship 200 million 5G-enabled phones in 2020, 450 million in 2021 and 750 million in 2022. Analysts estimate that the 5G chip set market will grow from $2.1 billion in 2020 to over $23 billion by 2026.
Analysts are expecting average earnings growth of 27% over the next five years. It’s also possible that that is an underestimation, especially in the next couple of years. The 5G revolution may be the biggest story of this market in 2020 and beyond and QCOM is right in the wheelhouse.
5G Dividend Stock #2: Verizon Communications (VZ)
Verizon in the largest U.S. wireless carrier. Of the four major U.S. telecom carriers (Verizon, AT&T, Sprint and T-Mobile), Verizon has by far the most wireless revenues with the largest network and coverage.
Verizon also has other sources of revenue in addition to wireless services including fixed line services like cable and internet (12%), as well as enterprise services like payment processing, online shopping and security systems (10%) and some online media. But, make no mistake about it, wireless is the main part of the business, accounting for 70% of revenues and 85% of adjusted earnings.
It is the closest thing to a pure wireless company. The other providers are distracted and tied up with mergers (the pending Sprint/T-Mobile merger and AT&T’s absorption of Time Warner) while Verizon is homed in on wireless. That’s a good thing.
The telecommunications business was once high-growth technology as wireless proliferated in the 1990’s. But it has since become a slow-growth, stodgy business, more like a utility. It takes a massive investment to build out these cellular networks, which is why there are so few providers left. The U.S. market is also saturated. Everybody already has a cellphone and a plan. And people are dumping fixed line services left and right to cut costs.
The only growth area of the business left is cellular data services, for which there is fierce competition. The predictable cash flow from cellphone plans provides predictable revenue from which to pay dividends. But there is little earnings growth left, until now.
Verizon’s focus on wireless not only enables it to achieve better profitability than its peers, but it enables the company to focus on upgrading its networks and expanding 5G technology. It is well ahead of its peers as it built 5G mobile services in 30 cities in 2019. It is building the most expansive 5G network and is first to the party in most cases.
Smartphones with 5G are just hitting the market this year. Apple (AAPL) launches its 5G-enabled phones in September. The technology is just now descending on us. All the new technologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.
They will likely be able to charge higher fees per smartphone, as they will offer more and better services. The Internet of Things involving all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers.
Verizon is a great way to have your cake and eat it too. You get a conservative, high dividend-paying company that will get a strong boost of growth and enthusiasm from the benefits surrounding the 5G revolution.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More