Doubling up on telecoms paid big-Schafer Cullen

By Jennifer Ablan

NEW YORK (Reuters) - The surprising surge of telecommunications stocks in 2006 gave John Gould his best call of the year, and the big dividend hunter says the ride is not over for the phones group as they look poised to win the war with cable TV.

Gould, portfolio manager of the Schafer Cullen High Dividend Equity Fund CHDEX.O, told the Reuters Investment Summit he doubled his bet on telecom this year by adding Verizon Communications (VZ.N: Quote, Profile, Research, Stock Buzz) to his holdings. He had already held BellSouth BLS.N, which is being acquired by AT&T Inc. (T.N: Quote, Profile, Research, Stock Buzz), which he also owns.

Not only does Verizon meet Gould's rich dividend criterion, but he believes the Baby Bell operator's huge investment in running fiber-optic lines to homes will deliver increased profitability and give it an edge in the high-stakes fight with cable TV companies to provide phone, video and high-speed Internet services.

"You'll have a company that is going to increase its return on capital from 7 or 8 percent from where it is today to 10 or 11 percent two or three years from now," Gould said, noting it has spent billions of dollars to build out its cable and wireless network.

Gould said half of Verizon's network will be in place by the end of 2009 and once fully completed, its network operating costs will be reduced by 80 percent.

"Operating costs will come down significantly but it will take time," he said.

The bet has been a huge home run in 2006. After years as market laggards, the telecom group stunned Wall Street's brightest lights to turn in the best performance in the Standard & Poor's 500 index .SPX this year -- gaining 30 percent so far and outpacing even the red-hot energy group by 5 percentage points.

Shares of Verizon, which is the Dow Jones industrials' .DJI highest-yielding stock at 4.53 percent, have risen 23.6 percent this year.

AT&T, with dividend yield of 3.74 percent, is up more than 45 percent, and Bell South, yielding 2.49 percent, has surged more than 70 percent.

Gould said the telecom sector "really was an area the Street got wrong.

"There really was no expectation for synergies," he added. "I think everyone was focused on competition."