Will the Data Boom Pay Dividends?

Consumer demand for digital broadband is growing quickly. When will investors cash in on the boom?

Consumer demand for digital broadband is growing quickly. When will investors cash in on the boom?
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Some worry American Tower's shares could be overpriced at 50 times earnings, but as costs related to its conversion and debt pay-down become less onerous, its earnings will rise steadily. Its payout, now only 1.3 percent, will rise in proportion as net profit goes higher—possibly producing those digital-age, utility-like payouts for years to come.

New competition, old problem in tech. A number of diversified communication companies like AT&T, Verizon, Time Warner and Comcast are also benefiting from the data boom. The two largest, AT&T and Verizon, together added one million new accounts in the most recent quarter and reported higher net income that more than made up for any declines in landlines.

"Our view is that they are better than traditional utilities because they are not regulated to the same degree and the growth in demand is stronger," says David Cassese, associate portfolio manager on BlackRock's equity dividend team and a consumer and technology specialist.

The stocks of those companies are rising, many of them faster than the market as a whole, as investors seek out dividends in whatever form they can find them, he says. Surprisingly, the tech sector is now the highest dividend payer as the cash on hand for companies like Apple soars.

[Read: Earnings Drama Grows as Dividend Seekers Put Stock in Payouts.]

"They used to pay almost no dividends but tech companies are actually the biggest payers now," Silverblatt says. Intel and Microsoft, non-payers until they became dominant tech companies, pay out 4 percent and 3 percent, respectively. Apple launched a $50 billion share buyback Tuesday and boosted its dividend 15 percent to $3.05 give shareholders some of its $100 billion-plus in cash. But dividends yields are skimpy for most other tech companies, Silverblatt says, because the stock prices are still valued more highly by investors. The volatility of tech stocks makes them less attractive for income investors.

"You can lose all of your yield in a typical day's trading when the stock goes down," he adds. The big data providers enjoy the protection of high barriers to entry, he says, but Apple looked unassailable not long ago and innovations could alter the communications world, too. "You always have to worry about what's coming down the street," he says.

Telecoms and cable pay the old-fashioned way. The telecoms and cable companies, with their long history of high dividend payouts, are emerging as another way for investors to get steady income with the added bonus of possible stock appreciation if earnings rise.

To be sure, not all of the diversified service providers are steady payers—Sprint has not paid a dividend in five years, and CenturyLink stock was slammed this year when it cut its dividend. But for the most part, the telecom and cable companies are staying true to investors who buy them for income. Their corporate culture and shareholder base virtually require it, says Silverblatt. Even CenturyLink, which is mired in heavy debt and feeling the impact of lost landlines, continues to pay a yield of 6 percent, a figure that is "sustainable," according to a recent JPMorgan report.

Other, more established telecoms like Verizon and AT&T have the financial clout to keep paying dividends, even with steady declines in their traditional landline service keeping a drag on earnings. Other big players, the cable companies like Comcast and Time Warner, generate huge cash flow from a subscriber base that is relatively stable.

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Meanwhile, new competitors are looking more and more like old-line utilities (and could, in theory, structure dividends accordingly in the future). Amazon and Google are pushing more aggressively into data services that could create a steady income stream. Amazon is the dominant player in cloud computing with its 450,000 servers that store and manage data for thousands of companies. Google is starting to offer super-high speed 1 gigabit Internet and television service that is 10 times as fast as existing broadband, though it's limited to a few communities and termed "experimental."