September 18, 2012 | Comments (1)

This month at The Motley Fool, we’re taking an all-hands-on-deck approach to getting back to basics, culminating on Sept. 25 with Worldwide Invest Better Day. With this in mind, my Foolish colleagues and I are opening the floodgates and unleashing vital information to help you invest better. In a previous article. we reviewed stock diversification, a key fundamental of investing. Today, we’ll focus on telecom stocks.

Telecom Sector 101

For many years, the telecom industry was dominated by few players in clearly marked territories. But with the advent of cable, satellite, smartphones, and tablets, the lines of demarcation blur. Traditional telecom companies like AT&T ( NYSE: T ) now offer services like broadband and video. Meanwhile, cable and satellite companies like Comcast offer phone and wireless services. Even Internet and tech companies offer communication services like Microsoft ‘s acquisition of Skype. The race is on; all want to be the one-stop-shop for your communication and entertainment needs.

Source: The Motley Fool.

Without a doubt, Windstream and Frontier Communications — which primarily provide landlines to rural areas and small- and medium-sized cities — both pay mouth-watering dividends. But even though Windstream generates significant cash flow, the company carries a cumbersome amount of debt on its balance sheet and is losing money. Hefty debt loads and falling subscriber rates  also challenge Frontier Communications. Both companies’ 100%-plus dividend payout ratios signal they pay more in dividends than they make in earnings. Frontier cut its dividend earlier this year. Further cuts shouldn’t surprise investors. Meanwhile, communications equipment manufacturer Qualcomm pays a punier dividend, but has increased it substantially and has lots of room to grow even more.

A simple way to own the sector

If you’re clueless when it comes to telecom stocks, consider exchange-traded funds. Some ETFs mimic the performance of an index, like the S&P 500. while others provide specific exposure to certain sectors. Sector-specific ETFs like SPDR S&P Telecom ETF are helpful when you lack information to make a good investing thesis. Using the MSCI World Sector Weightings as a benchmark, roughly 4% of your overall stock portfolio should be allocated to the telecom sector.

Invest better

If you bet wrong in the stock market, it could cost you. Instead, develop a diversified strategy for adding all sectors to your portfolio. That way, regardless of what happens in the market, you’ll sleep well at night knowing a portion of your portfolio will prevail.

Think Frontier’s dividend looks mighty tempting? We’ve fully vetted the company for you, and the information is all part of our brand-new premium research report. In the report, you’ll find everything you need to know about Frontier, including key opportunities and risks facing the company. You’ll even score a year’s worth of analyst updates. To get all the details, click here now .

Join us for more investing basics on our microsite for Worldwide Invest Better Day. On the site, we’ve posted many exceptional articles aimed at helping you do just that.

Editor’s note: A previous version of this article incorrectly stated that Windstream had already cut its dividend. We regret the error.

Fool contributor Nicole Seghetti owns shares of AT&T and Microsoft. Follow Nicole on Twitter @NicoleSeghetti. The Motley Fool owns shares of Microsoft and Qualcomm. Motley Fool newsletter services have recommended buying shares of Microsoft. Motley Fool newsletter services have also recommended creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days .