AT&T (NYSE:T) is often considered a classic dividend stock. It's raised its dividend annually for 36 straight years, making it a Dividend Aristocrat of the S&P 500. It's one of the largest telecom and pay TV companies in America, and its takeover of Time Warner in 2018 made it a media titan.

AT&T's massive business, which is on track to generate over $26 billion in free cash flow (FCF) this year, makes it seem like a safe income investment. The stock currently pays a hefty forward dividend yield of 7.3%, and it looks historically cheap at nine times forward earnings.

A canvas bag labeled as "dividends".

Image source: Getty Images.

However, investors who are thinking about buying AT&T for its dividend should weigh the stock against that of top telecom rival Verizon (NYSE:VZ). I believe three qualities make Verizon a better dividend investment than AT&T -- even though it pays a lower forward yield of 4.2%, has only raised its dividend for 14 straight years, and has a higher forward P/E ratio of 12.

1. A better total return

When we compare dividend stocks, the total return -- which factors in reinvested dividends -- matters more than the current yield. Over the past five years, Verizon has delivered a much higher total return than AT&T.

VZ Total Return Price Chart

Source: YCharts

AT&T's stock has declined 15% over the past five years and wiped out most of its dividend gains. Verizon's stock, meanwhile, has risen 34%, and its compounded dividends nearly doubled those gains.

2. Stronger revenue and earnings growth

Past performance never guarantees future gains, but AT&T could continue to grow at a slower rate than Verizon for the foreseeable future.

AT&T's revenue and adjusted earnings rose 6% and 1%, respectively, last year. But this year, analysts expect its revenue and earnings to decline 6% and 11%, respectively, as cord cutters gut its pay TV business and the pandemic slams its media and advertising businesses. Its streaming platforms are also expected to burn more money.

Verizon's revenue and adjusted earnings rose 1% and 2%, respectively, last year. Analysts expect its revenue to dip 3% this year, mainly due to the pandemic's impact on Verizon Media, the online division that houses AOL and Yahoo's internet assets, but for its earnings to rise 1%.

Next year, AT&T's revenue and earnings are expected to rise 2% to 1%, respectively, supported by stronger sales of 5G phones and WarnerMedia's recovery. Verizon's revenue and earnings are expected to rise 4% and 3%, respectively, as it sells more 5G phones and stabilizes Verizon Media.

3. A simpler business model

Verizon is generating more stable growth than AT&T because its business is simpler. Verizon is the largest wireless carrier in the U.S., and it generates most of its revenue by selling wireless equipment and services to consumers. AT&T currently ranks third in the wireless market behind T-Mobile, which merged with Sprint earlier this year.

Verizon's smaller pay TV division, FiOS, and Verizon Media only generated 16% of its revenue last quarter. These units struggled throughout the pandemic, but they're nowhere near as significant as AT&T's entertainment group and WarnerMedia divisions, which generated 42% of its revenue last quarter.

Verizon's $4.4 billion purchase of AOL and $4.5 billion takeover of Yahoo's internet assets were arguably misguided, but they're tiny compared to AT&T's $49 billion takeover of DirecTV and its $85 billion buyout of Time Warner.

DirecTV, which AT&T is reportedly interested in selling, is now the epicenter of its dying pay TV business. As for Time Warner, it's still unclear if AT&T can leverage its media properties to expand streaming platforms and effectively compete with Netflix, Disney, and other big rivals.

Therefore, investors who want a simple telecom play should stick with Verizon and avoid AT&T's messy media ambitions.

The key takeaways

AT&T and Verizon might initially seem similar. Both companies spent just over half their FCF on dividends over the past 12 months, which gives them plenty of room for future hikes, and they're both chipping away at mountains of long-term debt.

But a deeper look reveals that AT&T's high yield and low valuation mask fundamental flaws. AT&T seems to be biting off more than it can chew, and its declining stock price could offset its dividend payments for the foreseeable future.

Verizon isn't an exciting investment, but it should generate more predictable returns than AT&T. That steady growth, along with its high yield and low valuation, make it a better dividend stock.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.