We recently compiled a list of the Dividend Contenders List: Top 15. In this article, we are going to take a look at where Cogent Communications Holdings, Inc. (NASDAQ:CCOI) stands against the other dividend contenders.
Dividend stocks have long been favored by investors for the income they generate, and they become even more appealing when dividends increase over time. Investors frequently seek out companies with a strong history of raising their dividends, as this growth boosts their income over the long term. Sustaining long-term dividend growth is challenging. For instance, “dividend aristocrats” are companies that have grown their dividends consistently for at least 25 years, and only about 68 US companies have been successful in achieving this. This demonstrates how difficult it is to attain such a high standard. However, many companies still manage to build shorter dividend growth histories, showcasing their resilience and potential to reach even greater milestones over time. Dividend contenders are well-regarded for having raised their dividends for 10 straight years, though they have yet to reach the 25-year mark needed to be considered long-term dividend growers.
Investors are drawn to dividend growth stocks, as these stocks have shown strong performance over the years. Data from Ned Davis Research covering the past 50 years revealed that high-quality companies that initiate and increase dividends have delivered higher returns and lower volatility than an equal-weighted index. By holding a portfolio of dividend growth stocks, investors can potentially achieve not only favorable risk-adjusted returns but also a more stable investment experience—one less impacted by the risks of market timing, which can reduce long-term gains. This strategy can help investors build wealth steadily over time, contributing to a more secure financial future.
Recently, tech stocks have surged to the forefront, and investors are capitalizing on this momentum, temporarily overshadowing dividend stocks. However, this shift doesn’t imply a dim outlook for dividend stocks. Over the long term, dividend growth stocks have consistently demonstrated their strength and reliability. According to a report by Nuveen, companies that consistently grow or start paying dividends have delivered higher annualized returns with less volatility compared to other parts of the equity market. Although these dividend growth stocks don’t outperform in every market condition, their solid risk-adjusted returns over extended periods make them a strong foundation for an equity portfolio.
Also read: Dividend Champions List: Top 15
Michael Clarfeld, manager of the Dividend Strategy portfolios at ClearBridge Investments, supports investing in dividend stocks. Clarfeld emphasizes the value of long-term compounding, viewing dividend stocks as essential for a well-rounded portfolio. He advocates for a dividend growth approach, focusing on companies capable of steadily increasing their dividends over time. Instead of chasing high yields for immediate gains, he advises investors to consider total return, which includes the reinvestment of dividends. In an interview with Morningstar, he noted that the average company in his portfolios has compounded dividends at around 9% annually, meaning an investor’s income could potentially double every eight years. Clarfeld further said that dividend investing centers on evaluating a company’s cash flows and how they allocate payouts to investors.
In this dividend contenders list, we will take a look at companies that have raised their payouts for at least 10 consecutive years.
Our Methodology:
This list focuses on dividend contenders—companies known for raising their dividends consistently for 10 years but less than 25. From this group, we selected those with the highest dividend yields as of November 11, ranked from lowest to highest yield.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
An aerial view of an internet exchange point, illustrating the importance of an online service provider.
Cogent Communications Holdings, Inc. (NASDAQ:CCOI)
Dividend Yield as of November 11: 4.89%
Cogent Communications Holdings, Inc. (NASDAQ:CCOI) is a multinational internet service provider company that offers services related to internet access and data transport. Oppenheimer highlighted the company in its recent investors’ note as the firm mentioned that the growing demand for data centers is surpassing infrastructure development, which is expected to result in capacity limitations by 2025. The surge in demand is driven by the need for vast computing power to support large language models and other artificial intelligence applications. The stock has surged by 6% since the start of 2024 and in the past 12 months, it has delivered a staggering return of 27%.
Cogent Communications Holdings, Inc. (NASDAQ:CCOI) reported mixed earnings in the third quarter of 2024. Its revenue for the quarter came in at $257.2 million, which fell by 6.6% from the same period last year. As vacancy rates rise and lease initiations or renewals decrease, leading to fewer tenants, the company has experienced a slowdown in new sales to corporate clients, which has adversely affected its corporate revenue. In addition, it continues to see reduced office occupancy rates across its properties in North America’s central business districts, mainly due to remote work policies introduced during the COVID-19 pandemic.
That said, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) isn’t entirely a poor choice; it could still be a strong option from a dividend perspective. The company’s cash position is strong, with its trailing twelve-month levered free cash flow coming in at over $101 million. In the most recent quarter, it also generated $52.4 million in operating cash flow, which showed a significant growth from $22.2 million in the prior-year period. Alphyn Capital Management, in its Q3 2024 investor letter, also highlighted the company’s strong performance in its core operations. Here is what the firm has to say:
“In its latest earnings release, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) reported steady, albeit unspectacular, performance in its core operations. There has been some progress on extracting cost synergies from the Sprint acquisition, and there is some potential for value creation through monetizing “hidden assets” from its IPv4 and data center co-location fees. The company has made progress in realizing cost synergies from the spring acquisition and may unlock additional value by monetizing “hidden assets” such as its IPv4 holdings and data center co-location fees. However, the crux of the investment thesis remains the potential for significant revenue growth from waves. Without this catalyst, I believe the stock could drop to the low $60s, but with waves revenues materializing, the upside potential could exceed $150.
It is interesting to see what happened with Lumen, a competitor to Cogent, after announcing a $5 billion deal to build a custom network for Microsoft’s data centers on July 24th. The stock jumped from around $1.50 to approximately $7 per share. From my understanding and based on reading a short seller report,2 Lumen is primarily acting as a contractor in this deal, and it is estimated to retain only $800 million in one-time profits from construction and only $21 million in recurring profits.
In contrast, Cogent has the potential to generate over $500 million in recurring operating profits3 if it can successfully sell its wave revenues over the next few years. The capital expenditure is much more limited, as Cogent is connecting an existing infrastructure that all its customers can use instead of a bespoke construction for just one customer. While I don’t expect the same dramatic market reaction as Lumen’s, Lumen’s stock rally was partly due to relief from its potential bankruptcy risk as the influx of cash will help manage its substantial $18 billion debt; I do think this situation reflects the market’s appetite for companies providing infrastructure critical to AI and cloud development.”
Cogent Communications Holdings, Inc. (NASDAQ:CCOI) is one of the best stocks on our dividend contenders list as the company has been growing its dividends consistently for the past 49 quarters. It currently pays a quarterly dividend of C$0.995 per share for a dividend yield of 4.89%, as of November 11.
Overall CCOI ranks 7th on our list of the top dividend contenders. While we acknowledge the potential of CCOI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CCOI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.