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By Siraj Sarwar

Investors today face two major challenges. First, there is the uncertainty generated by the ongoing economic crisis in Europe and the resulting volatility in the U.S. markets. Second, there are the historically depressed yields available from most fixed income investments. This past year, the number one performing stock sector has clearly been the telecommunications industry. This is based on its high-dividend payouts. The average 4.8 percent yield being paid by telecom stocks is especially attractive to many investors currently, given the overall low rate environment. Telecom stock appeals to investors for their minimal exposure to the risks presented by European markets (zero exposure in some cases). Telecom stocks, as a whole, also show a record of stable cash flow generation.

AT&T, Inc. (T) through its subsidiaries and affiliates provides wireless and wireline telecommunications services in the United States and internationally. AT&T is famous for paying stable and high dividends. The company has a long history of dividend hikes. Recently, it announced an increase in dividends, which takes its quarterly dividend to $0.45 cents per share.

Over the years, the company has shown a solid financial performance. For the full year of 2012, the company reported over-all revenue of $32.6 billion, representing an increase of 0.2%. It was able to report record smartphone sales and strong wireless postpaid net adds. At the end of 2012, its smartphone sales stood at 10.2 million, and wireless revenues were up 5.7%. In addition, the company was able to cut operating expenses by 2.6%, which enabled it to achieve net income of $7.3 billion compared to $3.9 billion in the past year.

Furthermore, over the years, the company has been showing solid cash flows. At the end of 2012, the company was able to generate record cash flows from operations. In the last year alone, it was able to stretch operating cash flows by nearly $4 billion to $39.2 billion. In addition, AT&T is aggressively spending in growth opportunities. For the past year, its capital expenditures stand at $19.7 billion.

For the full year of 2012, the company generated record free cash flows of $20 billion, which adequately cover dividend payments of $10 billion. The company is also aggressively working on a share repurchase program. By the end of 2012, it had paid $13 billion in share repurchase. Repurchase programs are always vital for investors as a decrease in the share count can further increase dividends.

AT&T is a safe pick for dividend investors. The company has a strong revenue base and solid investment strategy to continue to post strong results. Its cash flows are also in a strong situation to support dividends and share its repurchase program; though, at the end of 2012, it had returned $23 billion in combined dividends and share repurchases.

Verizon Communications Inc (VZ) is a provider of communications, information and entertainment products. Verizon is one of the best dividend payers in the telecom industry. Recently, the company announced a quarterly dividend of $0.5150 cents per share. For the full year of 2012, the company paid dividends of $2.015 per share, yielding at 4.66%.

Over the years, the company has been able to generate strong revenue growth. In the past three years, on average, the company was able to increase revenues by 2.4%. At the end of Q4, the company had generated revenue of $17 billion, representing an increase of 1.5% over the past quarter. In addition, it was able to cut operating and support expenses by 3.5% to $9.6 billion.

Furthermore, the company has solid cash flows at present. At the end of 2012, its operating cash flows stood at $31 billion, representing an increase of $1 billion over the last year. However, due to the company's aggressive investment in growth opportunities, its free cash flows condensed to $11 billion, while its capital expenditure increased to $20 billion, an increase of $4 billion over the past year.

Verizon looks like a safe pick for income oriented investors. It anticipates increasing revenues by 2% and an increase of 6 to 18 cents in Earnings Per Share [EPS]. In addition, the company is aggressively looking to decrease debt levels. In 2012, it was able to decrease debt by 15% to $54.1 billion. The company anticipates further decreasing the debt levels to $49 billion by the end of 2013.

Windstream Corp (WIN) is a provider of technology solutions and advanced communications. Windstream was formed in 2006 as a result of the merger between Alltell's local telephone services and Volar Communications. At present, the company offers a quarterly dividend of $0.25 cents per share. The company has been able to sustain a similar dividend over the previous five years. For the full year of 2012, it has paid a dividend of $1 per share, yielding at 12.08%.

Over the years, Windstream has been able to increase revenues at a high pace. In the past three years, on average, the company was able to increase revenue by 27.1%, at a time when the industry average stands at a negative 2.7%. Since 2009, it was able to double revenues from $2.9 billion to $6.1 billion at the end of 2012.

On the negative side, it was not able to convert revenues into earnings at high margins. Still, its net profit margin stands at 2.7% relative to an industry average of 3.5%. In addition, due to an aggressive acquisition strategy, the company debt-to-equity ratio is very high at 7.3.

However, the company has strong cash flows to cover both dividends and debt. At the end of 2012, its cash flows from operations stood at $1,778 million, representing an increase of $549 million. Its free cash flows also stretched from $527 million to $676 million while its dividend payments stood at $588 million. Windstream looks like a safe dividend pick as it has the potential to generate strong cash flows.

Source: 3 Telecom Stocks For Stable Dividends