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Which telecom stock is right for your portfolio?

Shares in Australia’s renowned businesses have flourished in the most recent S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) bullish run, pushing the benchmark index over 5,200 points. Now that share prices have come back to healthy levels, we should now be on the prowl for those same businesses that are now “cheaper”.

Let’s start from the top and work our way downwards. Telstra (ASX: TLS), Australia’s top telco is ex-government owned and controls the largest subscriber base by a long way. In recent years, Telstra has made its way into many investors’ trophy cabinets as a top performer.

Since 2011, when it was a very modest $2.60 per share, it began producing a strong signal that was received by many prospective shareholders. It was pushed from that low up to over $5.00 in recent months, only to now be seemingly dropping out of portfolios left, right and centre. In the last month, shareholders have torn up contracts and thrown away the key, but why? If you’ve pushed all of your money from a term deposit into Telstra you would be “laughing all the way to the bank”. Perhaps those investors are taking their well-deserved spoils and cashing in.

Telstra is still a very good stock, even at a P/E of 15 it pays a fully franked 6.0% dividend — try getting that at the bank. However, as an investor looking for growth, I’m not ready to sign up with Telstra. Its recent shift, away from a growth opportunities and into customer service has me slightly concerned over the short-term share price. Combine that with a flailing stock market, all but exhausted local consumer market and a setback in the NBN roll out because of asbestos problems, I believe it will get cheaper.

Singapore Telecommunications (ASX: SGT) is where I had my money in recent times but it could potentially go higher than its current share price of $3.10 in the near term. However, media outlets regularly whip investors into a frenzy and make them think that all companies in one industry are tarred with the same brush. Foolish investors know this is not true, but I believe many of the issues that plague Telstra will also affect Optus. News on a tough local share market, slowing mobile subscriber growth and negative news about fibre optic networks being rolled out could lose the reception Optus has will investors. After all, no news is good news.

Hutchison Telecommunications Australia (ASX: HTA), owner of Vodaphone, has problems that will take a long time to fix. Yes, its share price has risen from February’s $0.28 to $0.38 today but that’s not hard, particularly when the whole ASX 200 had risen exponentially. Instead it exemplifies the point made above, that industry success (or failure) can really make a difference for stocks. Savvy investors deserve a strong turnaround before they will take the dive because, at the moment, the downside largely outweighs the upside.

It’s not a three-horse race anymore, so if you thought those were your three best options, think again. They’re far from it. In the past 12 months iiNet (ASX: IIN), TPG Telecom (ASX: TPM) and M2 Telecommunications (ASX: MTU) have risen 82%, 93% and 64.5% respectively and all offer fully franked dividends.

M2 is the newest player on the block, but not the least. It has healthy trendlines, long term growth potential and pays a 3.5% dividend. TPG shareholders are either expecting, or paying, too much for it. It’s a solid business and has eyes for expansion — recently it purchased new frequencies for services throughout Australia. iiNet was my favourite for the past year, and up over 100% in less than one year isn’t half bad. Recently, however, it looks like it’s headed south, so investors might be better to watch from a distance until its share price sees a solid kick in a healthy direction.

Foolish takeaway

Good stocks are hard to come by when prices rise. Experienced investors know this and wait for a turnaround. If the upside outweighs the downside, then maybe it’s worth risking your hard-earned cash. Keep on the lookout for good stocks that are succumbing to irrational falls because maybe, just maybe, it’s for no reason but to provide you entry into the stock.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Owen Raszkiewicz has no financial interest in any company mentioned.

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