AT&T (NYSE:T) has been a popular dividend stock for many years due to its relative stability, name recognition, and high yield. The company is a Dividend Aristocrat -- meaning that it has raised its dividend annually for at least 25 consecutive years -- and currently yields 6.8%.

However, AT&T has become an extremely complex business due to its history of acquisitions. Management's track record of making good acquisitions and integrating them well is shaky at best. That makes AT&T's high debt load especially risky. By contrast, Lumen Technologies (NYSE:LUMN) offers a higher yield despite having a lower dividend payout ratio and a simpler business that carries less risk for investors. That makes Lumen a more attractive dividend stock.

Strategic confusion reigns at AT&T

AT&T has made two massive acquisitions since 2015. First, it acquired satellite TV provider DIRECTV in 2015 for a total enterprise value of approximately $67 billion. Three years later, it closed the acquisition of Time Warner, forking over about $104 billion for the entertainment giant. These two deals played huge roles in driving AT&T's debt load up. At the end of last quarter, AT&T's debt totaled $158.9 billion, down modestly from $163.1 billion at the beginning of 2020.

A pair of satellite dishes on top of a house.

Image source: Getty Images.

In hindsight, the DIRECTV deal was a massive blunder, although AT&T's management has never admitted it. The deal closed just as the cord-cutting trend was accelerating. AT&T has suffered the worst subscriber losses in the U.S. pay-TV industry in recent years.

AT&T is now close to selling a major stake in DIRECTV (excluding the relatively small Latin American satellite business) at a valuation barely more than $15 billion, according to The Wall Street Journal. This looks like nothing more than financial engineering. AT&T just wants to get DIRECTV off the books -- even though selling part of the business at a low valuation will reduce its free cash flow for a relatively small cash infusion.

The Time Warner acquisition appears to be only slightly more successful. AT&T CEO John Stankey and new WarnerMedia boss Jason Kilar have upended the media company's business model, focusing all of its resources on building up HBO MAX as a Netflix competitor. That is hurting profitability in the near term. Alas, HBO MAX is off to a bumpy start due to confusing branding as one of many HBO variants. After more than six months, it has just 12.6 million subscribers. That's a fraction of the HBO subscriber base, even though HBO MAX is a free upgrade of the former. By contrast, Walt Disney's Disney+ went live last November and already has 86.8 million subscribers globally.

AT&T will have to invest heavily in HBO MAX to gain adequate scale. If it doesn't grow enough to offset declining parts of AT&T's business, free cash flow could continue to sag from an expected $26 billion or so in 2020 and 2021. That, in turn, could jeopardize the dividend, which costs about $15 billion a year, putting AT&T's dividend payout ratio in the 57% to 58% range (as a percentage of free cash flow).

T Total Dividends Paid (TTM) Chart

AT&T free cash flow vs. dividend payments. Data by YCharts. TTM = Trailing 12 months. 

There's a better alternative

By contrast, Lumen Technologies -- formerly known as CenturyLink -- pays a quarterly dividend of $0.25 per share. That gives it a yield of 10%, easily besting AT&T. Moreover, Lumen typically generates at least $3 billion of free cash flow annually, so the $1.1 billion it pays out in dividends represents a payout ratio well below 40%. The combination of a higher yield and lower payout ratio makes it a more intriguing dividend stock right off the bat.

To be fair, Lumen's debt load is higher than AT&T's relative to earnings before interest, taxes, depreciation, and amortization (EBITDA). However, thanks to its low dividend payout ratio, it has been able to deleverage rapidly. It ended last quarter with $32.6 billion of debt, down from $36.1 billion at the beginning of 2019.

Between Lumen's deleveraging and refinancing efforts, interest expense is on track to decline to $1.7 billion this year from $2.2 billion in 2018. Annual interest expense is likely to keep falling, ending up between $1.2 billion and $1.3 billion by 2023. That will support continued strong free cash flow and potentially allow Lumen to start growing its dividend in a couple of years.

There's a clear winner

AT&T's wireless business and its fiber broadband service are stable profit generators supporting its lofty dividend. However, AT&T also has substantial exposure to declining industries like pay-TV. Its haphazard response to the changes in how people consume content doesn't inspire confidence that the company can sustain (let alone grow) the profitability of its entertainment businesses.

Lumen also has exposure to declining markets like legacy voice service and DSL internet. However, rather than pouring resources into trying to revive troubled businesses, management is focused on leveraging its extensive fiber network to capitalize on growing demand for low-latency internet connections.

With a higher dividend yield, better dividend coverage, and less operational risk in the business, Lumen Technologies is a far more attractive dividend stock than AT&T.

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.