When I think about growth stocks and possible sectors to target for growth the Communication Services sector
does not spring instantly to mind. What the hum-drum name hides though, is a basket of high-growth tech names most investors would love to own.
According to data from Factset the Communication Services sector is going to be one of the fastest-growing next year. This year’s tepid 3.4% will accelerate to over 12% in 2020, not market-leading but strong enough to keep investors interested.
The Communications Services Select ETF (XLC) is one method for investors to gain access to the sector. The problem for me and many other dividend-oriented investors is that it only yields about 0.90% at today’s prices. That’s about half the broad market average and far below the 10-year Treasury with the risk of single-sector exposure. Investors looking for yield can find better in other sectors without the volatility associated with tech stocks.
High-Yield Dividend Growth In The Communication Services Sector
Digging into the Communication Services index it is clear to see why the yield is so low. Along with dividend powerhouses like AT&T (T), Verizon (VZ), and Comcast(CMCSA) are dividend-duds like Facebook (FB), Google (GOOG), and Netflix (NFLX). While the latter three are hot growth stocks it’s likely that average investors already own them in some form be it ETF, mutual fund, IRA, or 401(k).
Within the Communication Services sector there are not only good dividend payers there are a couple of great dividend payers. Comcast is paying the lowest yield, about 1.90%, but that is offset by a super-low 25% payout ratio and a 20% 5-year compound annual distribution growth rate. Yields from AT&T and Verizon are higher, 5.25% and 4.05%, but equally safe and rising if at a slower rate.
The combination of high-yield and EPS growth is driving these communication stocks higher. The good news for investors is that at current levels they still represent a bargain. The highest valued of the three is Comcast at 12.73X 2020 EPS leaving ample room for upward movement.
The broad market is trading about 17.5X forward earnings and pays only 1.85% in yield. Most of the high-growth tech names on the XLC roster trade well above 20X forward earnings with no yield. A simple multiple expansion could add 10% to 100% in value to these stocks over the next 12 months. Although I do not expect to see these stocks double the outlook for high double-digit total returns over the next twelve months is high.
The Technical Outlook Is Bullish
The chart of Verizon is the most promising. The stock has been trending sideways over the last year but near the all-time high. The bias in price action is bullish and edging higher even while trapped within the range. Resistance is near the top of the range, near $61.50, and may be broken over the next few weeks. A move to new highs would be bullish and likely lead VZ up to retest the all-time high at $63.75.
Shares of AT&T have been moving higher this year and recently reached resistance. Resistance is at the two-year high and so far strong. Even so, I expect to see the two-year high retested if not broken due to convergence in the indicators, specifically the MACD. The convergence of momentum with the new high is a sign of market strength that typically results in the continuation of trends. There are some risks, competition for streaming is one, but the outlook for growth remains.
Comcast price action has been in consolidation since hitting an all-time high earlier this year. The stock is now trading just above a potentially key support level where it may reverse. The indicators are still bearish so investors are cautioned to wait for support to confirm before considering bullish positions.