Gyrations in the U.S. stock market have been capturing headlines worldwide, but European stocks have had it even worse. While the S&P 500 Index was down roughly 4% through the end of August, German and French stocks had fallen 17% year-to-date, while English stocks had lost 8% of their value in the same period.

The ongoing debt crisis in Europe is causing even fundamentally sound stocks to plummet. This has created, in some cases, exceptional opportunities to lock in rich dividends at bargain share prices.

Because it’s difficult to predict when the European debt crisis will end, I think the safest way to invest in this market is by owning dividend stocks. Dividend income helps cushion the negative effects of stock-market swings, and this is why I think European telecoms are especially attractive right now. These stocks offer generous yields and a measure of safety compared with stocks from other European industries. Think about it: even if governments in some of these countries impose more austerity measures, few Europeans are likely to scrimp on their wireless service and Internet access.

With that, here are three European telecoms I like for their strong cash flows and impressive yields. Keep in mind that dividends on European stocks are subject to tax withholdings, so your best course may be to hold these stocks in a taxable account and reclaim withheld foreign taxes on your tax return.

France Telecom (NYSE: FTE)
Forward yield: 11%
With mobile telecom operations in France, Poland and Spain, France Telecom is one of Europe’s largest mobile phone service providers. The company is rebuilding its balance sheet after a decade-long acquisition spree. Despite debt that is still fairly high at $45 billion, or 115% of equity, investors shouldn’t be too worried. The French government owns 20% of the company and is not likely to let it go bankrupt. Also, France Telecom’s annual cash flow of $19.6 billion is more than enough to fund $5.8 billion in dividend payments while reducing debt.

France Telecom’s revenue rose 1.3% to $32.5 billion in the second quarter of 2011, compared with $32.1 billion in the same quarter a year ago, but EBITDA (earnings before interest, taxes, depreciation and amortization) fell 5% to $5.22 billion from $5.48 billion  due to the crisis in Egypt and regulatory issues in Belgium and Switzerland.  The number of total subscribers grew 9.2% to 217.4 million customers, while the mobile customer base climbed 10.1% to 158.4 million.

A mobile service price war in Europe is negatively impacting France Telecom’s earnings, which fell 17% year-over-year in the first half of 2011, from $5.08 billion to $4.20 billion.  The company plans to divest businesses in European countries where it’s not a top player such as Switzerland, Austria and Portugal and expand its footprint in faster-growing markets such as the Middle East and Africa.

France Telecom paid out 61% of last year’s earnings as dividends and currently yields 10.8% based on the forward dividend. The company’s shares are trading at 11 times earnings and near a 52-week low, providing investors with a nice entry point. France Telecom recently reiterated its commitment to pay a $1.99 dividend in 2011 and 2012, and declared an interim dividend of $0.85 payable in September.

Vodafone (Nasdaq: VOD)
Forward Yield: 7%
U.K.-based Vodafone is a global leader in mobile telecom. The company operates in Europe, Asia, Africa and the Middle East, and owns a 45% stake in Verizon Wireless (NYSE: VZ). During the past five years, Vodafone’s revenue has grown 9% to $73.5 billion, and profits have increased 7% to 12.6 billion. Net earnings from continuing operations rose 2.3% from $20.2 billion in fiscal 2010 to $20.7 billion in fiscal 2011, which ended in March. Vodafone used $19.4 billion in proceeds from asset sales to pay down debt, increase dividends 7% and repurchase $9.3 billion of its own shares. The company has a stellar balance sheet with $11 billion in cash and debt of $60 billion, representing just 40% of equity. 

Vodafone expects to pay an annual dividend of $1.92, which gives shares a yield of about 7%. Payout is conservative at 54% of earnings and leaves ample cushion for dividend growth. The company is trading at 11 times earnings.
   
Telefonica (NYSE: TEF)
Forward Yield: 11%
Telefonica is the largest wireline and mobile phone carrier in Spain. The company also owns Movistar, one of the largest mobile operators in Latin America. Telefonica is also Mexico’s second-largest mobile carrier. Telefonica’s operations in Latin America and other markets outside of Spain contribute 70% of sales and are the main engine driving earnings growth, yet panic in Europe has caused shares to tumble. In the past five years, Telefonica’s earnings have grown 20% to $13.6 billion and dividends have risen 39%. The dividend payout has increased from 46% to 62% of earnings.

Due to layoffs in Spain, the company will be taking a 2.7 billion euro charge, which will likely reduce earnings this year, but could position Telefonica for better profits next year. The company’s stock has been battered in 2011 and now trades at a P/E of about 7.

Telefonica is committed to paying a $2.28 dividend in fiscal 2011, which the company will make in two installments payable in November of this year and May of next year. The company plans to increase the annual dividend to $2.48 in fiscal 2012. At the current $20 share price, Telefonica shares have a forward yield of about 11%.

Risks to consider: All three of these companies pay dividends in euros, which creates currency risk for U.S. investors. I’ve converted dividend amounts from euros to dollars based on current exchange rates, but an increase in the value of the dollar compared with the euro could reduce the actual payments you receive.

Action to take — > My top pick is Telefonica due to its track record of dividend growth, huge Latin American presence and cheap valuation. Telefonica shares have suffered unfairly because of the company’s Spanish roots, but it actually derives over two-thirds of revenue from outside Spain, so it’s a safer pick than it may seem at first.
Conservative investors may prefer Vodafone, which has the strongest balance sheet and safest dividend of the three, while France Telecom is a nice balance of both risk and safety.