How Dividends Change the Game for AT&T Shareholders

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, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today, I'm looking at telecom giant AT&T (NYSE: T  ) . The company leans on an extremely dependable revenue source based on 108 million wireless subscribers. These customers are so reliable that they stick around and invite some friends over even as Ma Bell raises prices on a regular basis.

The rock-solid revenue stream and predictable expenses combine to form a torrential flow of free cash. AT&T uses that active cash influx to power one of the most generous dividend policies on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . It's an eternal race between AT&T and fellow telecom Verizon (NYSE: VZ  ) , and Ma Bell currently runs ahead of Big Red:

T Dividend Yield Chart

T Dividend Yield data by YCharts.

Income investors love to see dividend policies expanding every year, and the Dow's telecoms certainly deliver on that promise. Their payouts have soared dramatically over the last decade, even in the face of the market panic in 2008:

T Dividend Chart

T Dividend data by YCharts.

These dividend checks make a world of difference for AT&T's shareholders. The stock itself has largely tracked alongside its Dow peers in the long run. But if you reinvested your dividend checks along the way, there's really no contest.

T Total Return Price Chart

T Total Return Price data by YCharts. Using the DIA exchange-traded fund to simulate the Dow's returns with reinvested dividends.

The telecom market is in a state of upheaval right now. The two-player dominance of AT&T and Verizon is being challenged as smaller players combine to pose a new threat. Sprint-Nextel (NYSE: S  ) recently landed a massive cash investment from Japanese network Softbank, and it also picked up data networking specialist Clearwire. T-Mobile US (NYSE: TMUS  ) merged with prepaid expert MetroPCS and is using Metro's network assets to improve its own high-speed services. Combined, T-Mobile and Sprint nearly add up to a third 100-million subscriber Rolodex in the same class as Verizon and AT&T.

Even so, none of the rising challengers can match the wealth and infrastructure of the big two. It's also safe to assume that AT&T will fight hard to stay relevant, no matter what new innovation the smaller players might bring to the table. In other words, Ma Bell remains a safe bet for the long run, even as the wireless industry evolves. Expect this dividend to lead the Dow for many years to come.

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