Technologists tell us we’re in the early stages of the third wave of the Internet: the Internet of Things (IoT). It follows the first wave, in which people adopted the Internet through desktop computers, and the second wave, in which the world adopted use of the Internet through mobile devices, such as smartphones.

In this third wave, millions of people around the world are adopting apps, devices and systems that integrate the Internet with our day-to-day lives in new ways. Within the next decade, every machine, vehicle and electronic device will incorporate features that connect to the Internet and make use of its advantages — including remote monitoring and control, data accumulation and retrieval, and automation of functions now done manually.

#-ad_banner-#Some examples of IoT already in widespread use are Fitbits, credit-card-accepting parking meters and smart TVs. More and more cars are equipped with Internet connections, and it’s no longer a novelty when a friend says he can control his thermostat or lock his front door remotely. From smoke detectors that automatically call the fire department to factory machinery that responds to orders made 5,000 miles away, the IoT will soon become a fact of life. It’s estimated that 90% of “things” are not connected to the Internet yet, and that the number that are will rise from around 18 billion in 2015 to at least 35 billion in 2020.

That’s why shares of Cisco Systems (Nasdaq: CSCO) are a great buy now.

Cisco is the world’s largest networking company. As such, it’s positioned in the sweet spot of the Internet’s third wave. With literally billions of machines and devices expected to be connected to the Internet in the next decade, the demand for networking systems will be enormous. And as the market leader, Cisco is poised to cash in.

Cisco was founded in the mid-1980s by information technology engineers working to integrate Stanford University’s various networks. They eventually left Stanford but used the systems they helped develop to found Cisco Systems (short for “San Francisco”). As the Internet took off, Cisco became a leading maker of routers and switchers — the “traffic cops” of the Internet — that were flexible enough to handle signals from different network protocols, a key requirement as the Internet expanded globally.

Growing its product lines through both research & development and a series of strategic acquisitions, Cisco remained a leader in these backbone systems as the Internet exploded in the 1990s. The company became especially entrenched among internet service providers (ISPs), obviously a crucial, fast-growing market, while adapting over and over to changes in technologies and enterprise needs. Cisco made the jump to wireless technology effectively and remains a leader in both broadband hardware and wireless systems.

In this century, Cisco remained a key ISP vendor while also diversifying widely into other markets, including cable set-top boxes, home WiFi routers and digital cameras. Some of these product lines have thrived; others were discontinued. Facing significant competition from such companies as Juniper Networks (NYSE: JNPR), Hewlett-Packard (NYSE: HPQ) and Alcatel-Lucent (OTC: ALALF), Cisco has continued to make strategic acquisitions and has expanded significantly in Asia, especially India, to take advantage of lower costs. It has also restructured a couple of times, reducing overhead to boost profit margins. All along, Cisco has remained admirably cutting-edge and at the forefront of Internet backbone technologies. In recent years, it has become especially proficient at Internet security products and systems, a fast-growing market.

As the Internet of Things proliferates, the complexity faced by internet service providers, data centers and a slew of new entrants to networked world will create enormous challenges. Cisco is one of the few companies in the world that can offer top-to-bottom integrated solutions that include hardware, software and security and the promise of remaining adaptable as technologies change. Analysts think Cisco is the best-positioned provider to consolidate the heavily fragmented network security market, creating a huge revenue opportunity as it increases market share.

Cisco is financially strong, with low debt and strong cash flow. In addition to its growth prospects, the stock yields 3.1% at recent prices — and the dividend could continue to rise sharply (it’s quadrupled in the past five years) as management looks to reward shareholders using the company’s ample cash stream.

While the shares have risen significantly in recent weeks, Cisco remains reasonably priced given its potential over the next several years. Use dips as buying opportunities for a company that truly provides the backbone for the Internet of Things.

Risks To Consider: Cisco Systems’ shares have rallied from their lows and could be due for a short-term pullback on lower-than-expected global demand.
    
Action To Take: Buy Cisco Systems below $29.

P. S. Everyone knows that dividend payers crush other stocks. It’s not a matter of opinion. You can just look at the stats. But what’s really interesting is why they do so much better. We’ve found the answer here.

Disclosure: Nick Lanyi owns shares of Cisco