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For many years, income investors have gravitated toward telecom stocks because of their generous dividend yields. The average yield of dividend-paying telecom stocks is currently 4.7%, well above the Value Line median.

To create our list, we ran a screen of stocks in the Telecom Utility, Telecom Services, and Telecom Equipment Industries, and ranked them by dividend yield, from highest to lowest. Our only other criterion was that all issues trade above $5.00 a share.

Although these three industries sound very similar to one another, there are stark differences between them, and even between individual stocks in each group. Operators in the Telecom Utility Industry are generally regulated, and generate most of their revenue by providing customers with traditional fixed-line voice service. However, this legacy business is steadily shrinking, and many of these utilities are looking to expand their services to include wireless communications, high-speed Internet, and television. Stocks in this group typically offer the highest yields of the three industries under review, and many have substantial overseas operations.

The Telecom Services group includes several integrated telcos, which provide wireline, wireless, and other non-traditional services. Companies in this industry may have traditional wired operations, but most rely heavily (or solely) on wireless service for their revenues. Yields in this group are normally attractive, though not as high as those in the Telecom Utility space.

Companies in the Telecommunications Equipment Industry produce technologies and services that are used to facilitate people's communications. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multi-national corporations, telephone companies, governments, universities, institutions, commercial businesses, and consumers. Stocks in this group normally have lower dividend yields than their Telecom Utility and Telecom Services brethren.

In this screen, we chose to highlight two companies, Telecom Corp. of New Zealand (NZT), and AT&T Inc. (TFree AT&T stock report) as they both had yields in the top third of telecom issues paying dividends, and have investment prospects that may appeal to certain investors. Subscribers can replicate and, perhaps more important, customize this screen using Value Line’s online stock screening tool.

Telecom Corp. of New Zealand

The Telecom Corporation of New Zealand Limited, along with its various subsidiaries, provides telecommunications services in New Zealand and Australia. It was founded in 1987, and is based in Auckland, New Zealand. The telecom’s offerings include fixed line, mobile, and Internet services to residential customers, businesses, and wholesale markets. It also provides converged technology and telecommunications solutions for its business customers. It has about one million fixed line residential customers, two million mobile connections to consumers and businesses, and 800,000 fixed and mobile Internet and broadband customers.

The company has spent the past three months in transition mode following its spin-off of wholesale Web capacity provider Chorus. The government required the split so that it could legally award the unit with a majority of the infrastructure work needed for the nationwide Ultra-fast Broadband initiative.

In addition to demerging, Telecom NZ has also been focusing on two high growth areas: the mobile and broadband segments (with recent revenue growth of about 12% and 15% respectively). To this end, management is looking at increased smartphone penetration. The company is also planning on revamping its image in light of its split with Chorus, focusing on customer satisfaction and service.

This issue should be of interest to income-oriented investors. The stock’s Timeliness Rank has been suspended, a result of its split, but its dividend yield remains well above its peers at 7.3%. Given the strong free cash flow position, further increases may be likely.  

AT&T Inc.

AT&T Inc., together with its subsidiaries, provides telecommunications services to consumers, businesses, and other providers worldwide. Founded in its present form in 1983, AT&T is headquartered in Dallas, Texas. The company sells various handsets, wirelessly enabled computers, and personal computer wireless data cards. Various segments provide data services like switched and dedicated transport, Internet access and network integration, business voice applications over IP-based networks, and more. 

Over the past few months, AT&T has bowed to regulatory pressure and dropped its bid for T-Mobile, USA. Several regulators opposed the deal on antitrust grounds, and the decision was a costly one for the company. It will have to pay Deutsche Telekom (DTEGY, T-Mobile’s overseas owner) over $3 billion in cash and $1 billion in spectrum and network sharing agreements for canceling the proposed deal. Furthermore, AT&T will now have to find new ways to bolster its wireless airwaves.

The company has faltered over the past few months, in part due to the canceling of its deal, and also as a result of greater-than-expected subsidies for smartphones (notably Apple's (AAPL) iPhone 4S), which has cut into revenues. Soft postpaid ARPU (average revenue per user), along with increased staffing/marketing expenses, also played a part in the decline.

That said, we do expect the company to bounce back over the long term. Growth in the handset category is likely to accelerate, leading to big gains for the carrier, as subsidies fall and data usage rises. Furthermore, the traditional wireless segment is set to benefit from past restructuring efforts, acquisition related economies of scale, and favorable broadband and U-verse trends. These factors should provide the needed bottom-line boost going forward.

This issue would be of most interest to long-term and income investors. The stock has a substantial dividend yield, currently at 5.6%. In addition, the hefty free cash flow make future hikes quite likely, in our view. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.