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Which telecom should you own?

In the telecommunications industry there are many stocks which are appealing in different ways. Some have experienced rapid growth over the past few years whilst others may be yet to take full advantage of their potential.

Many investors hold Telstra (ASX: TLS) shares for solid income in the form of a 28-cent dividend. Since 2011, the share price has rallied and has diluted the yield of the stock and it is now less appealing to investors searching for both yield and growth. The signing of an $11 billion agreement with the NBNCo in 2011 was the catalyst for a great run up in share price of over 70%. However without any substantial contracts or growth opportunities presenting themselves in the near term, the share price is unlikely to experience the same amount of growth in coming years.

The company has been hinting at further expansion into Asia for some time, which will see a whole new market open up for the telecom giant. However, it would still be a long way off and could come with its own risks. Investors hoping for some short-term buffer to the share price will be pleased with the possibility that the company will increase its dividend by one cent for the next two years.

The only other mobile and fixed internet provider worth its weight in salt is Optus, owned by Singapore Telecommunications (ASX: SGT). It has a much smaller presence than Telstra in Australia but is bigger in Asia, particularly in Singapore where it derives 35% of its revenues. It has a market capital around $640 million, which is only slightly ahead of its second Australian rival Vodafone, owned by Hutchison Telecommunications Australia (ASX: HTA) but offers a more stable share price, greater customer satisfaction levels and pays a dividend.

An emerging threat to the well-known brand names of Optus and Telstra is M2 Telecommunications (ASX: MTU), which has recently bought Primus Telecom, Eftel and Dodo. Its share price has increased 88% in the past 12 months alone but this Fool thinks it could go even higher. It offers products to both wholesale and retail clients, which include small and medium businesses and telecommunications providers. It pays a 3.2% fully franked dividend but Morningstar anticipates that to increase as its earnings per share (EPS) goes from 25.3 cents to 55.9 cents by 2016.

Amcom Telecommunications (ASX: AMM) provides IT and telecommunications solutions to businesses and governments across Australia. Its business-grade data and internet, cloud and IP voice services have enabled the company to bolster return on assets (ROA) at 17%. Currently trading at a price-to-earnings ratio (PE) of 23, investors and the market are weighing in on the future potential of the company.

The last stock to consider for a place on your watchlist or in your portfolio is one that frequently brings on a hindsight headache. It’s left many investors in a ‘what if’ moment since it’s increased more than 369% since early 2010. Vocus Communications (ASX: VOC) is a small cap that owns and operates global telecommunications networks spanning from Australia and New Zealand to Asia and the US. In an ever increasing global communications market, it is very well placed to take advantage of rapidly increasingly data usages by individuals, businesses and governments.

Foolish takeaway

It’s important to diversify your portfolio to take advantage of the best companies in any industry and at any size, which should help mitigate losses in times of market volatility and when sector specific issues arise. Smaller stocks will be much more volatile than their larger counterparts but can offer more growth opportunities, particularly for telco stocks in Australia where the number of new customers is slowing.

Foolish investors know to do their due diligence on a company and consider it from every angle before making a decision to buy or sell. Although smaller companies information may be hard to come by, sometimes you can get a great insight to a company based on your own experiences as a consumer of their goods or services.

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Motley Fool contributor Owen Raszkiewicz owns shares in M2 Telecommunications.

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