Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week I want to take highlight telecom giant AT&T (NYSE: T ) .
Cream of the crop
It took a few decades, but no matter how many times you break AT&T up, it just keeps coming back together stronger than ever. It might seem counterintuitive to begin thinking about AT&T now with the stock at a new 52-week high, but there are still plenty of catalysts and reasons for Ma Bell to be a fixture in any long-term investors' portfolio.
I think any discussion with AT&T needs to begin with the recent merger-mania that we've seen sweep through the telecom sector. Deutsche Telekom's T-Mobile agreed to purchase MetroPCS Communications (NYSE: PCS ) last month while Japan's SoftBank agreed to take a 70% stake in Sprint Nextel (NYSE: S ) just last week. The thought process for a lot of investors is that the cash infusion from T-Mobile and SoftBank should give the 4G networks from MetroPCS and Sprint a big enough boost that they'll be able to better compete against the big boys, AT&T and Verizon Wireless, the latter of which is comprised of a joint venture between Verizon (NYSE: VZ ) and Vodafone Group (Nasdaq: VOD ) .
I see things a bit differently, though, as these buyouts are being made under distressing cirucumstances. Sprint has tried and failed on multiple occasions to hook up with LightSquared to roll out a 4G network and seems unrelenting in its stance to not run with Clearwire as its 4G LTE partner. Also, MetroPCS and Leap Wireless, the company behind the Cricket service, have been burning through customers at an alarming rate as costs have been on the rise. I believe this only solidifies AT&T and Verizon Wireless' position as the two key mobile market players, period, until the earnings reports and coverage data proves otherwise.
A bare necessity
I often harp on the fact that having necessity stocks in your portfolio is great because they can help shield you from recessions and have products that aren't prone to wild price fluctuations. I believe AT&T fits the bill as a bare necessity stock.
I know what you're thinking: "I can go without my cell phone!" Trust me, I've tried it and I was miserable! Even if you could manage, you'd be in the minority. According to a report released by the Pew Research Group in June, we are using our cell phones to access the Internet and their email more and more each year. In 2009, 31% of adults surveyed used their phones for Internet and email access. This year's survey saw a jump in that figure to 55%. Smartphones are becoming cheaper and the idea of a cell phone as a luxury item is long gone. With consumers' reliance on networking and devices growing, AT&T and Verizon Wireless are sitting in the driver's seat when it comes to maintaining their margins through data plan and package price hikes.
AT&T versus Verizon
The ultimate Goliath versus Goliath battle is really between Verizon and AT&T. Verizon does hold an edge on AT&T when it comes to 4G LTE coverage, which could potentially lure more Apple iPhone 5 users to switch carriers, since AT&T's coverage only hits a fraction of Verizon's markets at the moment. However, AT&T has been taking steps to improve shareholder value at every turn, including announcing a share buyback that could total $8.77 billion when all is said and done, as well as steadily boosting shareholder dividends. Furthermore, AT&T trades at a reasonable discount to its peer Verizon with a forward P/E of just 11 compared to Verizon's 16. I see reasons to be optimistic about both, but AT&T appears to be the better buy right now.
Will you accept this collect call?
But let's examine why we're really looking at AT&T today: its premium dividend. AT&T has a long streak of boosting its dividend, which was interrupted only briefly in 2003, and is currently yielding 4.9% -- about five times the return you'd expect from a CD at your local bank. Here's a quick look at AT&T's recent dividend history:
Source: AT&T Investor Relations.
That odd blip in 2003 has to do with when the company was SBC Communications and chose to pay out three concurrent quarterly special dividends. While nominal, those special dividends interrupt what would otherwise be a multidecade annual increase in AT&T's quarterly dividend. Still, AT&T is on pace to return about 74% of its expected 2012 EPS to shareholders as a dividend and has actively been repurchasing its shares in an effort to continuously boost shareholder value.
It's really hard to argue against owning a company that has basically become a staple of the American consumer. AT&T's products are practically necessity items that many consumers can't live without, which places its products often beyond the scope of recessions. With a rich history of dividend increases and a management team that understands the business well, AT&T is a name you can place under your pillow for a good decade or three without much to worry about.
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