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What are we looking for?

U.S.- or Canadian-listed telecom stocks with strong yields, reasonable valuations and good prospects for growth.

With the prospects of a low-interest-rate environment for the foreseeable future, investors are being lured to dividend-paying stocks to provide income in their portfolios. With U.S. markets also at record highs, many investors are also cautious about the future direction for equities. Telecom stocks are often thought of as a defensive sector that should be somewhat insulated in the event of a market correction.

The screen

We will be using Recognia Strategy Builder to search for large U.S. or Canadian listed telecom stocks (market cap more than $10-billion) with strong yields and reasonable valuations.

We will first screen for telecom sector stocks with a yield of at least 3 per cent per year. In addition, to find telecoms with a track record of performance, we will select only companies with positive price performance in the past year.

Analysts who study the industry in depth often have above-average knowledge of headwinds and tailwinds affecting individual companies. We will select only from companies with analyst consensus ratings of strong buy, buy or hold.

Finally, to ensure we are not overpaying for our investment, we will look for telecom stocks with reasonable valuations as measured by their forward price-to-earnings ratio. We will select only companies with a forward P/E of less than 20.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.

What did we find?

AT&T tops our list with the highest dividend yield at 5.4 per cent and the lowest forward P/E ratio at 13.3. AT&T had a rather flat stock performance in 2014 – as a result, its valuation and dividend yield are attractive compared to many of its peers. The company's stock price has been held back by concerns of a price war among U.S. wireless firms.

BCE is the largest Canadian telecom on our list with a market cap over $46-billion. It posted a great performance over the past 12 months with its stock rising 18.5 per cent. In spite of its strong stock performance, the company has a 4.7 per cent dividend yield and a forward P/E of 17.8.

Verizon Communications turned in a rather lacklustre performance over the past year with its stock price up just 6 per cent. However, the company is one of the few on our list rated a "buy" by analysts and has a forward P/E ratio of just 13.8 per cent. The company's 2015 growth is expected to be driven by wireless subscriber growth and the continuing upgrade cycle to 4G LTE technology.

Historical performance

Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 13.8 per cent annualized return compared to 5.3 per cent for the S&P/TSX 60 index and 13.6 per cent for the S&P 500 index.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

U.S.- or Canadian-listed telecom stocks

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