As a dividend growth investor, I focus on investing in stocks that pay ever-increasing dividends.
I use Dividend Radar as my primary watch list of dividend growth stocks. Updated and published every Friday, Dividend Radar tracks stocks with dividend increase streaks of at least five years. You can download the latest copy (dated June 4, 2021) here. The newest list contains 764 stocks, only 15 of which are in the Communication Services sector.
This article presents the seven top-ranked dividend growth stocks in the Communications Services sector. I assess the quality of dividend growth stocks using DVK Quality Snapshots and rank stocks by their quality scores.
The Communication Services Sector
The Communication Services sector contains companies that provide communications services primarily through fixed-line, cellular, wireless, high bandwidth, or fiber optic cable networks. The sector was created in September 2018 with a restructuring of the GICS sectors, which incorporated the prior Telecommunication Services and many former IT, media, and internet-related companies.
From: Baron Insight – An Overview of the New Communication Services GICS Sector (source: FactSet)
The Communication Services sector is one of four so-called Sensitive sectors. It categorizes sectors into super sectors based on how they perform during different business cycle phases. Sensitive sectors ebb and flow with the overall economy but to a limited degree. Companies in these sectors are not immune to a poor economy, but economic downturns may not severely impact them.
Sector and Performance Comparison
It is pretty informative to compare sector averages and the historical performance of sectors over different periods and to see how the Communication Services sector compares:
Sector averages and the historical performance of sectors (sources: Dividend Radar • Fidelity Research • Google Finance)
The table is color-coded to show the highest (green) and lowest (red) values in each column. Notice that the Communication Services sector has the lowest representation in Dividend Radar and the highest 5-year average Beta.
Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:
Sector performance charts (source: Fidelity Research, 4 June 2021)
The Communication Services sector is trailing the S&P 500 in the trailing 1-month and 5-year time frames.
Quality Assessment
DVK Quality Snapshots provide an elegant and effective way to assess the quality of dividend growth stocks. I use DVK’s scoring system but have my systems to rate and rank dividend growth stocks.
Here are the quality indicators used in determining a stock’s quality score:
You can read about these quality indicators by following the provided links.
DVK Quality Snapshots scoring system and my rating system
My rating system maps to quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15 points.
To rank stocks, I sort them by descending quality scores and break ties by considering the following factors in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
I rarely need to break ties with Dividend Yield.
Best Communication Services Sector Dividend Stocks
Here are the seven top-ranked dividend growth stocks in the Communication Services Sector:
The stocks I own in my DivGro portfolio are highlighted.
1. Comcast (CMCSA)
Founded in 1963 and headquartered in Philadelphia, Pennsylvania, CMCSA is a global media and technology company. The company operates through Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment, Theme Parks, and Sky segments. CMCSA delivers broadband, wireless, and video connectivity; creates, distributes, and streams entertainment, sports, and news; and operates theme parks and resorts.
2. Verizon Communications Inc. (VZ)
VZ provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. Formerly known as Bell Atlantic Corporation, the company changed its name to Verizon Communications Inc in June 2000. VZ was founded in 1983 and is based in New York, New York.
3. Activision Blizzard, Inc. (ATVI)
ATVI develops, publishes, and sells interactive software products and entertainment content for the console, personal computer, and mobile platforms. It also maintains a proprietary online gaming service and engages in creating original film and television content. ATVI was incorporated in 1979 and is headquartered in Santa Monica, California.
4. AT&T Inc. (T)
Incorporated in 1983 and based in Dallas, Texas, T provides telecommunication, media, and technology services worldwide. The company operates through four segments: Communications, WarnerMedia, Latin America, and Xandr. The company was formerly known as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005.
5. Omnicom Group Inc. (OMC)
OMC is a holding company that provides advertising, marketing, and corporate communications services worldwide. The company’s branded networks and specialty firms provide advertising, strategic media planning and buying, digital and interactive marketing, direct and promotional marketing, public relations, and other specialty communications. OMC was founded in 1944 and is based in New York, New York.
6. BCE Inc. (BCE)
BCE, a telecommunications and media company, provides wireless, wireline, Internet, and television services to residential, business, and wholesale customers in Canada. It operates in three segments: Bell Wireless, Bell Wireline, and Bell Media. The company was formerly known as Bell Canada Enterprises Inc. BCE was founded in 1880 and is headquartered in Verdun, Canada.
7. John Wiley & Sons, Inc. (JWA)
JWA operates as a research and learning company worldwide, empowering researchers, learners, universities, and corporations to achieve their goals in an ever-changing world. The company operates through three segments: Research Publishing & Platforms, Academic & Professional Learning, and Education Services. JWA was founded in 1807 and is headquartered in Hoboken, New Jersey.
Please note that these stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).
I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.
Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Simply Safe Dividends. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.
Commentary
The top-ranked Communication Services sector stocks are all Investment Grade stocks, but they have widely varying quality scores, dividend yields, and dividend growth rates. Except for ATVI, the stocks are discounted relative to my fair value estimates.
CMCSA is the top-ranked stock in the Communication Services sector and is the only stock rated Excellent. With a yield of 1.75% and a 5-year DGR of 13.0%, the stock is likely to provide solid total returns in the future, provided the company can maintain its generous annual dividend increases and the earnings growth to support those increases.
VZ offers a robust yield of 4.38% and so is appropriate for income investors. The stock is available at a slight discount to my fair value estimate. Don’t expect fireworks from this company, though. It is growing earnings at a very modest rate, and its 5-year DGR is only 2.2%.
Another stock that income investors could consider is T, which offers a very generous yield of 7.11%. However, notice the company’s very low Dividend Safety Score of 40 (Unsafe). I hesitate to make significant investments in stocks with low Dividend Safety Scores. AT&T recently announced that it would merge its content unit WarnerMedia with Discovery (DISCA) to create a new entertainment giant in the global streaming market. Along with that announcement, the company indicated that it would reduce its dividend post-spinoff. So, I’d advise against investing in T for dividend income, at least until it becomes clear what the stock will yield after the dividend cut.
I don’t own any of the other stocks, and none of them interest me at this time. ATVI looks interesting but mainly as a growth prospect and only at a lower entry price. OMC seems interesting, too, especially given its considerable discount. But I prefer to invest in stocks with higher quality scores.
Concluding Remarks
This article is the first in a series that will present the top-ranked dividend growth stocks in each of the GICS sectors. I hope this series will help readers identify suitable candidates for further research and possible investment and help with sector diversification.
All but one of the top-ranked Communication Services sector stocks are trading at discounted valuations. I think CMCSA presents the best opportunity, given its rating and impressive dividend growth rate. For income investors, my choice would be VZ.
Thanks for reading!