To consistently earn the highest returns, financial advisors
often recommend using a low-cost fund that tracks the S&P 500
since there's only perhaps a 30% chance of beating the index over
time with actively managed investments.
#-ad_banner-#That's all well and good if you're a growth
investor, but what if your goal is to maximize your dividend
yield without taking any undue risk?
In that case, tracking the market definitely isn't the way to
go. One of the most popular funds that does this,
SPDR S&P 500 (NYSE:
, yields a meager 1.9%. And it comes with all the
stomach-churning volatility you typically see in the broader
That's why income investors so often turn to sectors known for
generous dividends -- like telecommunications. Stocks in this
sector often boast yields well north of 3%, and many are far less
volatile than the market.
The big question is which are the best ones to own?
My answer: Why not own them all through an ETF? That way,
you'll be well-diversified across the sector but still able to
enjoy attractive yields.
In my opinion, the #1 choice for the job is
Vanguard Telecom Services ETF (NYSE:
. The $673 million fund has the type of rock-bottom expense ratio
(0.14%) investors have come to expect from Vanguard. Its main
rival, the $614 million
iShares U.S. Telecom ETF (NYSE:
, charges more than three times that (0.46%).
VOX also has a much better yield -- 3.8% vs. 2.7% for IYZ. And
it has performed better overall, posting a total return of 87%
during the past five years, compared with 79% for IYZ.
VOX tracks the MSCI US Investable Market Telecommunication
Services 25/50 Index which, as its name suggests, must meet two
main requirements at the end of each quarter: No single stock can
make up more than 25% of the index, and the index components with
more than a 5% weighting may not exceed a combined 50% of the
index's total value.
Although stated in general terms, in reality these
restrictions basically apply to
, by far the index's two largest holdings with weightings of
about 24% each. Key features of the top five holdings, which make
up 60% of the index, appear below.
Like its benchmark, VOX has a total of 30 stocks, with the
bottom 25 holdings accounting for 40% of assets. The fund has an
average market cap of $21.5 billion, somewhat smaller than the
category average of $30.1 billion. This is because VOX is
one-quarter small stocks, compared with the category average of
Because they don't yet have the financial wherewithal, these
small firms often don't pay dividends. This doesn't affect VOX's
yield much, though, because it's dominated by AT&T and
Verizon, and their dividends are secure and growing.
What's more, the portfolio doesn't contain an excessive amount
of small stocks, and the ones that do offer payouts often have
decent or even very high yields -- like
Consolidated Communications (Nasdaq:
, a $788-million local, long-distance, and internet provider
IDT Corp. (NYSE:
, a local, long-distance and wireless carrier with a $373 million
market cap, yields a solid 2.1%.
You'd think a higher-than-average small-cap allocation might
make VOX more risky, though that hasn't been the case because the
portfolio is tilted toward value stocks. As a result, it has been
nearly 20% less volatile than the overall telecommunications
services category during the past five years. Yet its price
performance over that period ranks it in the category's top
By comparison, main rival IYZ's five-year price performance
only places it in the middle of the pack. The fund was about as
volatile as the overall category during that time, too.
It's easy to imagine some investors being tempted to conclude
they might as well just buy AT&T and/or Verizon and be done
with it, but that would be a mistake, in my view. While both have
higher yields than VOX, they've lagged behind the fund
significantly in total return, delivering about 40% and 65%,
respectively, during the past five years.
VOX should continue to substantially outpace AT&T and
Verizon because of its meaningful exposure to smaller companies
with the potential both to grow faster and initiate or increase
dividends. The latter is a distinct possibility because some of
the smaller firms in the portfolio have been getting out from
under debt and increasing cash flows.
The smaller players are also looking to improve their
competitiveness, cost structures, and profitability through
M&A. Plenty of this has been going on already in recent
years, and it's likely to result in more telecom firms with
greater dividend-paying ability going forward.
Risks to Consider:
The telecom services industry is extremely competitive.
and other firms battling for market share could resort to a price
war that hurts the entire industry and hinders dividend
Action to Take -->
Vanguard Telecom Services ETF is the best way to garner dividends
from the domestic telecom services industry in the long-term.
Since the fund lacks direct international exposure, investors
seeking worldwide diversification may want to consider another
iShares Global Telecom (NYSE:
. The fund has a nice yield (3.5%), but its expense ratio is
higher (0.48%) and it has lagged VOX's performance by a wide
margin in recent years.
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