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For many years, income investors have gravitated toward telecom stocks because of their generous dividend yields. Indeed, the average yield of stocks in the telecom space is normally well above the Value Line median.

To create our list, we ran a simple screen of stocks in the Telecom Services and Telecom Equipment industries, and ranked them by dividend yield, from highest to lowest.

Although two industries sound very similar to one another, there are stark differences between them, and even between individual stocks in each group.

The Telecom Services group includes several integrated telcos, which provide wireline, wireless, and other non traditional services. Companies in this industry may have traditional wired operations, but most rely heavily (or solely) on wireless service for their revenues. Yields in this group are normally solid.

Companies in the Telecommunications Equipment Industry produce technologies and services that are used to facilitate people's communications. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, digital subscriber-line (DSL) and cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multi-national corporations, telephone companies, governments, universities, institutions, commercial businesses and consumers. Stocks in this group normally have lower dividend yields than their Telecom Services brethren. Readers can view all the dividend payers in these two industries on the list below. In this screen, we highlight Ericsson (ERIC).

Ericsson

Ericsson was established in 1876, and since then has evolved into is a leading global provider of networking infrastructure, broadband, and other telecommunications equipment. The company claims “when you make a call or browse the internet on your handset, tablet or mobile PC, you will likely use one of our solutions”. Indeed, 40% of the world’s mobile traffic runs through its gear, which includes 2G, 3G, and LTE base stations. Other significant markets it operates in are IP transport fiber, and IP Edge routers. Ericsson mainly provides services, software, and infrastructure to the world’s major telecom service providers, and fluctuations in those entities annual capital expenditure can have a material impact on ERIC’s earnings performance.

The company started out the year on a bit of a low note. In the March quarter, revenues were down 10% on a year over year basis, which was worse than our expectation for a low single-digit fall. The company faced difficult comparisons from last year’s strong results, and some of its larger contracts in developed markets like North America and JApan are winding down. Comparisons become easier in subsequent quarters, and ERIC ought to benefit from recent contract wins. Specifically, the company just inked a five-year deal to participate in Vodafone’s (VOD)Project Spring.

Although the recent top line performance disappointed, earnings-per-share results were slightly better thanks to an impressive 400 basis point increase in the gross margin. The driving force behind these pleasing results was a product mix shift toward projects involving mobile infrastructure buildouts, as well as increased intellectualproperty revenues and lower network rollout activity. We have concerns that the anticipated sales bump later in 2014 will involve some margin trade-off, which could limit the profit advance later in the year.

Ericsson has been paying out more than half of its income in dividends each year, and its healthy finances should allow it to employ a similar approach moving forward. Granted, the next payout isn’t likely until April, but our estimated 2015 dividend would represent a yield of 4.0%, double that of thet Value Line average.

 

Company Ticker Industry Name Dividend Yield
Vodafone Group ADR VOD Telecom. Services 9.41
Telecom N. Zealand NZTCY Telecom. Services 5.76
Manitoba Telecom Svcs. MBT.TO Telecom. Services 5.45
AT&T Inc. T Telecom. Services 5.26
Verizon Communic. VZ Telecom. Services 4.29
Ericsson ADR ERIC Telecom. Equipment 4.05
TELUS Corporation T.TO Telecom. Services 3.95
Comtech Telecom. CMTL Telecom. Equipment 3.17
Cisco Systems CSCO Telecom. Equipment 3.08
j2 Global JCOM Telecom. Services 2.33
Qualcomm Inc. QCOM Telecom. Equipment 2.11
Telephone & Data TDS Telecom. Services 2.08
Inteliquent Inc. IQNT Telecom. Services 1.99
Motorola Solutions MSI Telecom. Equipment 1.97
Atlantic Tele-Network ATNI Telecom. Services 1.95
Nokia Corp. ADR NOK Telecom. Equipment 1.92
America Movil AMX Telecom. Services 1.79
Black Box BBOX Telecom. Equipment 1.76
Juniper Networks JNPR Telecom. Equipment 1.65
ADTRAN, Inc. ADTN Telecom. Equipment 1.65
Marvell Technology MRVL Telecom. Equipment 1.63
Shenandoah Telecom. SHEN Telecom. Services 1.47
Broadcom Corp. 'A' BRCM Telecom. Equipment 1.25

 

At the time of this article's writing, the author did not have positions in any of the companies mentioned.