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Telecom Stocks: Your Best Buy for Dividends?

Dan Caplinger
December 21, 2012

Income investors can't count on their traditional go-to investments anymore to provide the kind of payouts they've grown to rely on. With bonds and other fixed-income investments having had their yields plunge, investors have had to look elsewhere to meet their income needs.

Today, we're concluding the Fool's week-long look at innovative investments to provide much-needed income for cash-strapped investors. Earlier this week, you had the opportunity to read about the double-digit yields that mortgage REITs offer, as well as the unique tax advantages of master limited partnerships and the diversified exposure that dividend ETFs provide. In the final article of this series, let's take a closer look at a specific sector of the stock market that has traditionally provided some of the richest payouts available: telecom stocks.

The foundations of telecoms
It may be hard for many younger investors to believe, but telecom stocks started out looking a lot like utilities. The telephone industry was heavily regulated for decades, with AT&T (NYSE: T) essentially having a monopoly on domestic landline service and therefore generating reliable yet government-limited income for shareholders year after year.

Even after the breakup of AT&T, regional Baby Bells still enjoyed dominance over their respective parts of the country. It took still more time for deregulation to take hold, for the long-distance business to fully separate from local landline service, and finally for the rise of mobile technology to gain ascendance and transform the industry from a staid and stable bastion of industry to a rapidly evolving growth powerhouse.

Still churning out cash
The pace of innovation among telecom companies has created a huge divide within the industry. AT&T and surviving former-regional Verizon are the top two telecom stocks in the U.S., both with rapidly growing wireless networks that the companies are using to support sales of mobile devices and lucrative data contracts. Yet despite huge capital expenditures for network expansion, the two companies maintain the two highest dividend yields in the Dow Jones Industrials. By contrast, former long-distance specialist Sprint Nextel (NYSE: S) has gained attention due to its recent capital infusion from Japan's Softbank, but it's been on shaky-enough financial ground that it hasn't paid a dividend recently.

On the other side of the spectrum are the companies that have taken on the leftovers of the legacy businesses of those high-growth telecom giants. Frontier Communications (NASDAQ: FTR), Windstream (NASDAQ: WIN), and Cen