Dow Morning Report: Are Dividend Stocks in Danger?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average  (DJINDICES: ^DJI  ) is slowly continuing its impressive record run this morning, up a modest 14 points just after 11 a.m. EST on optimism that the bull market in stocks can continue so long as global economic conditions keep improving and unforeseen negative events don't weigh on corporate performance. But among the Dow's 30 component companies, top-yielding dividend stocks AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Intel (NASDAQ: INTC  ) have underperformed the average over the past six months, raising questions about their ability to match the Dow's long-term performance.

The first thing investors should realize about dividend stocks is that the more reliant a company is on the payout for its value -- as opposed to future growth opportunities -- the more sensitive that company's stock is to changes in interest rates. From one perspective, if a stock has no growth prospects, its value is defined by the stream of future dividend payments. That makes the stock resemble a bond, heightening the correlation between the stock's price changes and those in the bond market.

For AT&T and Verizon, finding growth has been an ongoing struggle. Verizon's massive buyout of Vodafone's stake in the companies' joint venture Verizon Wireless was predicated largely on the difficulty in finding other promising growth opportunities, with the leading U.S. wireless carrier deciding that redoubling focus on the U.S. market was its best chance at maximizing its prospects. AT&T has been reluctant to respond with a major strategic move of its own, in large part because the U.S. market is largely saturated, forcing it to look abroad for higher-risk prospects with better reward potential. Yet the experiences of rural telecom companies, which have seen their legacy landline businesses deteriorate slowly but surely in recent years, show how important it is for AT&T and Verizon to avoid stagnating.

Intel, on the other hand, has been fighting hard to avoid becoming obsolete. Efforts to gain relevance in the mobile space have finally started showing early signs of success. Intel clearly has a long way to go before it can catch up to some of its faster-moving rivals; that is particularly true for Qualcomm, which exploited Intel's lapse in identifying the importance of mobile as an opportunity to take over leadership of the industry. Without that growth avenue, Intel will be left with an ongoing income stream from the waning PC market, and that could end up badly for shareholders in the long run.

So long as Verizon, AT&T, and Intel can grow, they should be able to trade independently of the bond market. But if their businesses ever stop growing for good, then the stocks could well start to act even more like bond surrogates, and that would make them far less attractive in the eyes of many dividend investors.

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