Special Report: A Secret in the Tech Industry

The dot-com crash at the turn of the millennium cast a long shadow over the tech industry. While the sector showed it had the capacity for amazing growth, it also showed that it had the capacity to completely bottom out and vaporize huge investments.

Because of this, a community of persistent doubters thinks the next big tech bubble is just around every turn. They cite that the industry’s average price-to-earnings ratio is too high, that private valuations have skyrocketed out of control, and that popular tech business models are not sustainable. After 15 years, the post-crash skepticism persists.

But after a years-long bull market, the tech sector has shown a different side to investors. It has shown that it can also be a home for conservative, low-risk investments.

Since the last big market drop in 2008, major chunks of the tech sector have proven to be no more volatile than the broad Standard & Poor’s 500 index.

By carefully choosing the industry within the tech sector, it is possible to assemble a reliable portfolio of stocks with a high dividend yield.

Where to Begin

A simple strategy for tech dividend investing is considering where you’d place a stock on a Monopoly board. Your core elements of land, utilities, and transportation are going to provide the most stable investments, so the closer you get to those, the better off you’ll be.

While there’s no space on the board for the telephone company, it would be right at home alongside Water Works and the Electric Company, so this is a strong place to start.

It’s no secret that communications infrastructure is one of the soundest, most stable investments an individual can make in the tech sector. Because the cost of establishing a telecommunications network is prohibitively high, competition in the sector is low, and the services these companies provide are indispensable.

Though the sector is dominated by a few mega-corporations, there are plenty of small-cap, high-yield domestic telecommunications stocks to choose from.

Consolidated Communications Holdings, Inc. (NASDAQ: CNSL)

CNSL is a telecommunications services provider that offers digital television, telephone, and high-speed Internet services in 11 states.

The foundation of the company stretches back to the earliest days of landline telephony when the Mattoon Telephone Company incorporated in 1894. Since 1924, that original telephone company has been acquiring smaller operations and expanding. It grew into the Illinois Consolidated Telephone Company in 1935 and assumed the name Consolidated Communications in 1984.

Today, the company qualifies as a rural local exchange carrier (RLEC), and its services vary from market to market. In some areas, it offers fiber-optic Internet services; in others it offers the more primitive DSL. In some areas it offers traditional copper-line telephone services, and in others it offers digital voice telephony.

Because it is costly and often unprofitable to bring communications services to areas with low population density, Consolidated Communications is expanding its footprint through the aid of federal grants.

In August 2015, it accepted $14 million in annual Connect America Fund (CAF) Phase II cash support from the Federal Communications Commission to deploy broadband to approximately 24,700 rural locations across seven states.

By doing this, the company hedges against risk and establishes itself, in many cases, as the sole service provider in a particular region. This is how it drives its consistently high dividend payment.

At the end of summer 2015, the company’s revenue was $393.6 million. Its CAPEX was $33 million, and its cash and cash equivalents were $6.9 million. Its CAPD (cash available to pay dividends) was $25.5 million, with a dividend payout ratio of about 77%. This was the 41st consecutive dividend payment, and it amounted to $0.38738 per common share.

The company’s debt-to-earnings ratio at the end of the quarter was a very low 4.4 to one.

Cogent Communications Holdings (NASDAQ: CCOI)

Cogent Communications is a multinational Internet service provider that does not deal with converged solutions such as telephone and television. It is data networking only.

The company was formed at the peak of the dot-com era, “rolling up” smaller service providers into a single larger company. During the dot-com bust, it cleaned up by buying some of the largest service providers in the world at a discount. As a result, its portfolio of data infrastructure holdings is vast, and it has one of the largest geographic footprints of Internet connectivity in the world.

With services in 42 countries, Cogent offers enterprise Internet access up to 1 Gb in speed, essential tier 1 IP transit services, colocation, and ethernet services. Its customers include AT&T, Time Warner, George Washington University, and financial law firm Cadwalader, Wickersham & Taft LLP, to name a few.

An investment in Cogent is an investment in the Internet itself.

During the company’s most recent quarter, it increased its number of customer connections by 13% and had earnings of $0.02 per share on revenue of $98.79 million. Earnings and revenue both missed guidance, but revenue still increased 4.4% year over year. Cogent’s dividend yield for the quarter was 4.7%, the highest it’s been since the company began paying out dividends in 2012.

There’s not a consensus among analysts about the near-term future of Cogent’s stock, but the average rating is a buy, and the target price is in the high $30 range. The 12-month high for CCOI was $40.48 and 12-month low was $25.84.

Windstream Holdings (NASDAQ: WIN)

Another communications infrastructure play, Windstream is both a telephone network operator and a network backhaul/managed services provider that has gone through continuous transformation as assets move through different corporations.

Windstream was formed in 2006 when Valor Communications Group merged with Alltel’s wireline business unit. The result was a rural-focused telecommunications company that spanned 16 states and included more than 3 million access lines.

Since its formation, it passed a million high-speed Internet customers, acquired seven smaller companies, and joined the Fortune 500.

Last year, the Federal Communications Commission (FCC) gave Windstream almost $25 million to expand rural broadband coverage under the Technology Transitions Order, which included experiments observing the impact of technology transitions on rural America.

In addition to its rural long-haul mileage, which grew by 5,600 route miles, Windstream joined 12 new 100G markets (including Buffalo, Denver, Houston, San Antonio, Oklahoma City, and Tulsa) in 2015 so far.

Windstream has paid high dividends since its inception back in 2006, but this year, there was a 1-for-6 reverse split, and the company’s networking assets were spun off into a new REIT called simply Communication Sales and Leasing (NASDAQ: CSAL). As a result, the usual dividends were reduced, and the shares of the REIT acted as a payout.

The new company focuses exclusively on acquiring and leasing communication distribution networks, including all the physical infrastructure formerly belonging to Windstream. Through a triple-net master lease agreement, it leases many of these networks back to Windstream, so the fortunes of these two companies are closely intertwined.

REITs are a dividend vehicle, so the company already had its first payout on October 15.

Iron Mountain Inc. (NYSE: IRM)

Stepping it up into the mid-cap range, Iron Mountain deals in data storage and information management. As an S&P 500 company and member of the Fortune 1000, Iron Mountain has consistently paid a high dividend for the last five years.

The company’s history is remarkable and worth reading even if not for the sake of investment. Iron Mountain’s founder Herman Knaust — a mushroom farmer — sponsored the relocation of European Jewish immigrants during the Second World War. He saw the vital importance of protecting information from war, disaster, and nuclear fallout. He opened the company’s first “Atomic Storage” vault on a hundred-acre plot that contained a depleted iron ore mine.

The first customer was a New York savings bank that shipped microfilm copies of all its deposit records and customer signatures to the vault for storage. The company expanded into paper document storage, medical and legal records, and in the 1980s went into computer backups.

Iron Mountain grew to become the very first national service provider in the industry, and today it works in 36 countries across the globe.

Its computer data management and backup services include cloud-based server and PC backups as well as “old-school” tape backups that are done onsite and hauled to the vault off-site.

Iron Mountain has spent much of the last few years changing its business to respond to changing demands. In short, it has focused on getting more out of developed markets, growing in emerging markets, and exploring new opportunities presented by these emerging markets.

In its data business, a promising partnership tucked in the company’s pocket is with newly acquired Dell subsidiary EMC. Iron Mountain’s data center and tape backup business is shared with EMC’s Data Domain business, exposing it to a large segment of the market.

The company’s historical dividend yield is around 6%, with an annual average payout of $1.90. Twice in the last three years, it has offered stock-based dividends as well.

It’s an extremely low-volatility business that consistently brings in $1.5 billion in revenue just for storing things. Its data storage business, while still growing, sits on a nice, safe cushion.

The Secret

The secret to tech dividend investing is knowing which subsections of the tech sector are resistant to market fluctuations. Infrastructure is key, but security and data warehousing provide equally safe avenues for investment.

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