How Dividends Change the Game for This Dow Stock

The wealth-building power of compound interest will never cease to amaze me.

It's a story of patience and attention to detail, where small differences in short time scales add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share price returns.

Let's take a look at telecom giant AT&T (NYSE: T  ) as an example. Ma Bell rarely offers the incredible double-digit dividend yields you often see from smaller communications stocks, but there's something to be said for consistency:

T Dividend data by YCharts.

At times, the yield has dipped below 2% -- hardly the stuff income-investing dreams are made of. But the actual payouts show a steady rise over two decades, and that changes everything for AT&T's shareholders:

T Total Return Price Chart

T Total Return Price data by YCharts.

This is what unruffled consistency can do for you. AT&T has been a component of the Dow Jones Industrial Average (INDEX: ^DJI  ) since 1939, and it has paid uninterrupted dividends since 1893. Recessions and world wars can't stop this money train. That's the kind of stubborn consistency you'd expect from a decades-long Dow member.

That's what AT&T is all about. Sure, you could buy MetroPCS (NYSE: PCS  ) or Leap Wireless (Nasdaq: LEAP  ) and hope for a buyout or some other catalyst to drive the share price. Or you might have picked up some Telefonica (NYSE: TEF  ) when the Spanish telecom's yield hovered in the double digits. But price gains are anything but guaranteed, and this is what happened to Telefonica's yield when the company needed to save some cash:

TEF Dividend Yield data by YCharts.

I'd take AT&T's smooth and solid payouts over those scary options anytime. If you're interested in high-quality dividends on your quest for high-yielding stocks, The Motley Fool has compiled a special free report outlining the nine most dependable dividend-paying stocks -- including Ma Bell. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your complimentary copy today at no cost. Just click here to discover the winners we've picked.

Fool contributor Anders Bylund has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 16, 2012, at 2:47 PM, PEStudent wrote:

    I agree that large companies who are gorillas in their sectors with a fairly stable decade of growth in income and sales, relatively low debt, stable ROE (showing they can keep putting money to work) and a 2%-6% dividend are a very stable and promising way to go at the right price (generally P/E's in the low 20's to the single digits, depending on growth rate).

    I put together a virtual portfolio 20 such stocks after June 15, here:

    http://simulator.investopedia.com/Portfolio/?gameid=191412

    The portfolio was put together because, as a retiree I'm slowly moving my holdings into such stocks and I wanted to see 1) how good is my selection method in terms of preservation of capital (not losing money!), and 2) how well will the portfolio perform compared to the overall market.

    1) As I write this, only 4 of the 20 stocks have dropped (not too unusual since the markets significantly up since the start). But only two of the stocks have dropped more than 0.62%, and they've dropped 2.28% and 7.08%.

    2) The market is up 8.26%, probably about 9% counting dividends. My stocks are up 5.84%, including $1900+ in dividends (on an intial $250K portfolio) I haven't gotten around to reinvesting.

    Most of the stocks in that portfolio dropped more slowly than average in the past during bear markets - surely because of their dividend and market-leading status.

    So I suppose their growth in bull markets should be similarly slower during bear markets.

    For what it's worth, the average 18.85% annual rate of return is just fine with me - especially since some of the stocks I actually own out of that portfolio, like Abbott Labs, have outpaced the overall portfolio.

  • Report this Comment On October 16, 2012, at 2:56 PM, PEStudent wrote:

    P.S. I also set up another virtual portfolio on July 6th of 23 very-high dividend (7% to 15% when I bought them) here:

    http://simulator.investopedia.com/Portfolio/?gameid=193310

    They are all S&P 500 3-stars or better, with generally stable histories, and they've grown 5.48% vs 7.31% (closer to 8% counting dividends) for the S&P 500.

    But they've failed the "preservation of capital" test: 12 of the 23 have lost value since 7/6. That shows to me I'm better off in a high-risk mutual fund with lots of such stocks than setting up my own small group of very-high dividend stocks.

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