If you're like most adults in the United States, you purchase some form of product from a communication services company. Ranging from internet access to television streaming, these essential companies provide services that make instant communication more widespread than ever before. This consistent demand and diverse selection of services may appeal to investors — especially those prioritizing high-dividend stocks.
Are you considering investing in communication services stocks? Read on to learn more about the current market landscape, what to look for in these stocks and how to start investing today.
What are communication services stocks?
Communication services stocks are stocks issued by companies that provide essential communication and entertainment services. Companies that issue these stocks may offer everything from traditional landline telephone services to cutting-edge streaming technology.
Investing in communication services stocks may come with enhanced growth potential and dividend yields, which may attract long-term investors.
Understanding communication services stocks
Stocks in the communication services sector might represent very diverse interests. Some of the sub-industries and business spheres in the communication services sector include the following among stocks in the communication services sector:
- Telecommunications services: Telecommunication companies are quintessential examples of communication services companies, providing telephone and internet services. Companies offering these services include Verizon Communications NYSE: VZ and AT&T NYSE: T.
- Cable and satellite TV providers: Companies in this sector offer traditional cable and satellite television options; many of these companies have also branched into streaming services. Examples of companies in this sector include Comcast NASDAQ: CMCSA and DISH Network NASDAQ: DISH.
- Internet service providers: Some telecommunications companies have shed their phone service component and now focus primarily on improving their high-speed internet services. An example of a company operating in this sector is Charter Communications NASDAQ: CHTR, best known for its Spectrum internet service brand.
Some companies are far-reaching and operate multiple sectors under a single business entity. For example, While AT&T is best known for its telephone services, it also operates several sub-segments that offer internet connection services, 5G tech and research and institutional telecommunication services. These diverse options may be some of the best communication services stocks for those who want to invest in a single company within the industry.
Why invest in communication services stocks?
Communication services stocks offer numerous benefits that appeal to investors, including widespread and consistent demand and portfolio investments in multiple areas and products. The following are major reasons some investors focus on the communications sector.
Growth potential
Communication services sector stocks may be particularly well positioned for future growth potential. As the global population becomes more connected, there is a continuous need for improved communication infrastructure. The rollout of 5G technology and expanding broadband services can drive growth in the telecommunications sector and the increased demand for international communication services.
Growing demands for content consumption can also be a major revenue driver for top communication services stocks, which can "double-dip" by offering internet connectivity and content through traditional television.
In addition to future growth potential, communication services stocks may benefit from asset investments that produce consistent recurring revenue. For example, companies that offer telephone services and access to streaming content usually do so on a subscription basis, providing predictable and recurrent revenue. It can be an added benefit for companies focused on growth and reinvestments, as it may provide a more consistent source of funds to manage projects.
Diversification benefits
As we outlined above, there are multiple types of communication service stocks. These include multiple types of companies, but many are now branching into various sectors. There is also a wide range of diversity in market capitalization, with everything from S&P 500 communication services sector stocks with billion-dollar capitalizations to small-cap stocks focusing on a specific market segment or product. Consider product and market diversity when narrowing down stocks to add to your portfolio.
Dividend yield potential
You might want to look at communication sector stocks with higher dividend yields to generate income from your investments. Dividends are payments made by a corporation to its shareholders as a portion of its earnings. They are typically distributed regularly, such as quarterly, and represent a return on investment for shareholders. A stock's dividend yield percentage compares its price per share with its annual dividend distribution.
While communications sector companies aren't required to offer dividends in the same way that real estate investment trusts (REITs) must distribute dividends, many companies in this sector elect to. For example, AT&T offers an exceptionally high dividend yield, with the company paying back 7.44% of its stock price annually as of September 2023. A communication services stocks list can be a solid place to compare new income-generating assets.
Risks and challenges
While the communication sector provides many opportunities, it also comes with challenges that investors must consider before buying.
Regulatory risks
Regulatory challenges and changes in the communication services sector are complex and multifaceted. For example, the Federal Communications Commission repealed net neutrality rules in 2017, allowing internet service providers to prioritize or throttle internet traffic based on content potentially. Many states developed their version of net neutrality laws, creating a complex regulatory landscape. Additional legal challenges and considerations may impact communication companies' revenue in the future.
Technological disruption
The tech industry has seen multiple disruptions to the traditional communications landscape — and this trend may be more likely to continue as consumers get more and more tech-savvy. For a clear example, consider technology's impact on day-to-day communication in recent years. For example, consumers increasingly use internet and WiFi-based communication methods like WhatsApp and social media websites.
These services have reduced demand for text and landline services, reducing revenue from companies that have invested heavily in infrastructure to provide these services. Investments in copper phone lines, for example, may become obsolete as newer technologies like fiber-optic cables and wireless networks offer faster and more efficient communication services. Consider the future communication environment as you analyze the communication services sector stock list.
Competitive landscape
Companies in the communication services sector often offer various services, including everything from streaming services to internet access. Diversification can help companies capture a broader customer base and mitigate risks, but it can also lead to intense competition with specialized providers. It can lead to a saturated market in developed countries like the United States, where existing infrastructure has enhanced market competition. Be sure to consider your individual risk tolerance when crafting your portfolio.
How to invest in communication services stocks
Investing in communication services stocks starts with a comprehensive market review, as this sector may be particularly competitive.
Research and analysis
When evaluating communication stocks, there are several key data points and metrics that you'll want to consider before you buy shares:
- Revenue growth over time: Communications companies are seeing an increasing demand for services, making them stronger potential growth stocks. Look at a company's total revenue and growth over time, comparing it to previous figures and market competitors. Steady or increasing revenue can indicate a healthy business, while declining revenue may cause concern.
- Dividend yield: Check the dividend yield if you want income from your investments. Generally, dividend yield percentages above 12% should give you pause and may be unsustainable.
- Debt levels: Analyze a company's debt levels and debt-to-equity ratio, which you can find on its corporate balance sheet. High debt levels can indicate financial risk, so it's essential to understand the company's ability to service its debt. Like revenue, this data point is best used with data from other companies offering the same services.
Investment strategies
Communication services stocks can be valuable additions to a long-term portfolio, including a retirement account. Many companies in this sector showcase higher-than-average dividends and product demand, making them valuable long-term holds. Consider year-over-year revenue growth and debt levels over time when considering which stocks are viable for long-term strategies.
Short-term traders may succeed using short-term trading strategies with communications companies with higher daily trading volumes. Short-term approaches like scalping and day trading can be possible using communications stocks, but you should be sure to compare data points like tight bid-ask spreads to be sure that your strategy fits the stock's current liquidity.
Risk management
You can take several steps to limit your risk when investing in communications service stocks:
- Diversify: Avoid putting all your money into a single communication stock or a handful of stocks — instead, spread your funds throughout multiple companies and sectors.
- Monitor your investments: Keep a close eye on your portfolio and adjust as needed. Review your holdings periodically to ensure they align with your investment goals and risk tolerance as they change over time.
- Use a stop-loss order: If you're using a short-term trading strategy, consider using a stop-loss order to limit losses if the market changes directions.
As with investing in any individual company's stock, never invest more money than you can afford to lose in any communications company.
Notable communication services stocks
Now that you understand how the communications sector works, let's look at a few of the sector's top players and some rising stars.
When measured by total market capitalization, the following are a few of the top communications sector stocks:
- AT&T: AT&T has a long history of providing communication services and has expanded into media with acquisitions like Time Warner. While it has shown consistent growth in its business, it has also faced challenges in recent years due to debt levels and changing consumer preferences. For example, in 2022, it cut its dividends to focus on growth.
- Verizon: Verizon has consistently grown its wireless business and invested heavily in expanding its 5G network infrastructure. It's also well-known for its consistent dividend payments, which have increased in value over the years.
- Comcast: Comcast is well-known in the communications sector for its diversified business, which extends beyond cable television into broadband internet, content creation and streaming services. It has shown growth in its broadband segment and owns media assets like NBCUniversal, with its strategic moves reflecting efforts to adapt to changing consumer preferences.
Emerging players
The following are a few lesser-known companies in the communications sector, which you may want to consider adding in addition to options with larger market capitalizations:
- Formula One Group: Formula One Group NASDAQ: FWONA holds commercial rights for the world's Formula One championship, one of the largest motorsports businesses around the globe. The company has expanded into more entertainment distribution in recent years, solidifying it as both a streaming and entertainment holding.
- Paramount Global: Paramount Global NASDAQ: PARAP is a diversified media and entertainment conglomerate operating in the communication services sector. The company owns a portfolio of iconic brands, including Nickelodeon and CBS, which helps it market and deliver a wide range of content to consumers.
- World Wrestling Entertainment: Best known for its series of professional wrestling tournaments, World Wrestling Entertainment NYSE: WWE is a worldwide media powerhouse. Its recent projects have involved international expansions into areas like the Middle East and Latin America, making it a stronger option for those looking for U.S. stocks with exposure across multiple continents.
Managing risk with communications stocks
A communications ETF can be a stronger choice if you're interested in investing in the communications sector without researching individual stocks. An exchange-traded fund (ETF) is a managed "basket" of stocks selected by professionals that follow a certain theme or aim to replicate the results of a particular index.
The right ETF provides instant exposure to multiple stocks within an industry and some potential tax advantages.
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