5G will launch the world into another level of the digital age and bring transformative new technologies; this 5G revolution will likely be a level of technological change we haven’t seen since the arrival of the internet in the 1990s, asserts Tom Hutchinson, editor of Cabot Dividend Investor.
Opportunities in technology will explode in the years to come. While plenty of investors will take advantage, few of them will be dividend investors. Dividend investors usually shun these high-growth stocks in favor of more conservative plays that pay a nice income.
But I’ve found a couple of ways dividend investors can participate in the 5G revolution while getting an income at the same time.
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Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%, although the smaller area is more profitable and better insulated from competition.
A chip is part of the processor that is essentially the brains of a computer, smartphone or device that controls other devices in the system. These chips are the cutting edge of computer technology and determine the power, speed and function.
Big deal, there’s lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it for the next couple of years at least. It is the undisputed king of the chips that will enable 5G technology. No other chip company is close.
While the first 5G networks were launched last year, they will meaningfully proliferate in 2020 when 5G-enabled phones start hitting the market. Over 75 5G devices are either in the process of being launched or in development. Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment.
Looking forward, Qualcomm estimates that smartphone makers will ship 200 million 5G-enabled phones in 2020, 450 million in 2021 and 750 million in 2022. Analysts estimate that the 5G chip set market will grow from $2.1 billion in 2020 to over $23 billion by 2026.
Analysts are expecting average earnings growth of 27% over the next five years. It’s also possible that that is an underestimation, especially in the next couple of years. The 5G revolution may be the biggest story of this market in 2020 and beyond and QCOM is right in the wheelhouse.
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Verizon (VZ) in the largest U.S. wireless carrier; it has by far the most wireless revenues with the largest network and coverage. It is the closest thing to a pure wireless company; ; wireless accounts for 70% of revenues and 85% of adjusted earnings.
The telecommunications business was once high-growth technology as wireless proliferated in the 1990’s. But it has since become a slow-growth, stodgy business, more like a utility. It takes a massive investment to build out these cellular networks, which is why there are so few providers left.
The U.S. market is also saturated. Everybody already has a cellphone and a plan. And people are dumping fixed line services left and right to cut costs.
The only growth area of the business left is cellular data services, for which there is fierce competition. The predictable cash flow from cellphone plans provides predictable revenue from which to pay dividends. But there is little earnings growth left, until now.
Verizon’s focus on wireless not only enables it to achieve better profitability than its peers, but it enables the company to focus on upgrading its networks and expanding 5G technology. It is well ahead of its peers as it built 5G mobile services in 30 cities in 2019. It is building the most expansive 5G network and is first to the party in most cases.
Smartphones with 5G are just hitting the market this year. Apple (AAPL) launches its 5G-enabled phones in September. The technology is just now descending on us.
All the new technologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.
They will likely be able to charge higher fees per smartphone, as they will offer more and better services. The Internet of Things involving all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers.
Verizon is a great way to have your cake and eat it too. You get a conservative, high dividend-paying company that will get a strong boost of growth and enthusiasm from the benefits surrounding the 5G revolution.
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