AT&T (T 0.21%) might seem like a great dividend stock. It pays a forward dividend yield of 7.3%, it's raised its payout annually for 36 straight years, and it spent just 57% of its free cash flow on those dividends over the past 12 months. The stock also looks dirt cheap at nine times forward earnings.
But AT&T's stock also fell more than 30% over the past five years. After factoring in reinvested dividends, it delivered a negative total return of 10% -- while the S&P 500 generated a total return of over 120%.
AT&T's decline was caused by the decelerating growth of its wireless business, the slow death of its pay TV business, and its ill-advised, debt-fueled acquisitions of DirecTV and Time Warner.
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AT&T is trying to streamline its business again by selling 30% of DirecTV and merging WarnerMedia with Discovery into a new stand-alone company. But as part of WarnerMedia's spin-off, AT&T plans to reduce its dividend and end its run as a Dividend Aristocrat of the S&P 500.
AT&T could still pay a 3%to 4% yield after the spin-off, but investors might be better off buying more reliable dividend stocks. Seagate (STX 2.59%) and PepsiCo (PEP +0.76%), which pay lower yields but have brighter prospects than AT&T, could be viable alternatives.
1. Seagate
Seagate and Western Digital (WDC 1.63%) hold a near-duopoly in platter-based HDDs (hard disk drives). But unlike WD, which generates roughly half its revenues from flash-based SSDs (solid state drives), Seagate still mainly sells traditional HDDs.
Seagate's strategy might seem risky, since SSDs are smaller, faster, more power-efficient, and less prone to damage than HDDs. But SSDs are still more expensive than HDDs, and cost-conscious data center and enterprise customers generally prefer cheaper HDDs with higher storage capacities.
To maintain that price advantage, Seagate continuously launches new high-capacity HDDs while reducing its sales of low-capacity HDDs -- which face tougher competition from SSDs in the consumer-facing market. This cycle, which is less capital-intensive than WD's strategy of developing SSDs, generates a lot of excess cash for Seagate to spend on buybacks and dividends.
Seagate has reduced its number of shares by 23% over the past five years. It raised its dividend for the first time in four years in 2019, then boosted that payout again last year. It pays a forward yield of 3.1%, and its dividend consumed just 63% of its free cash flow over the past 12 months.
Analysts expect Seagate's revenue and earnings to rise 1% and 12%, respectively, this year, and its stock still looks cheap at 12 times forward earnings. It's delivered an impressive total return of more than 370% over the past five years -- and its shares could continue climbing as it sells more HDDs to data-hungry customers.
2. PepsiCo
PepsiCo might seem like a risky investment, since soda consumption rates are falling across many countries. But PepsiCo doesn't just sell carbonated drinks -- it's a consumer staples giant that also sells non-carbonated drinks like sports drinks, bottled water, teas, and juices, as well as packaged foods through its Quaker Foods and Frito-Lay divisions.
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PepsiCo's flagship sodas are evolving with lower-calorie versions, new flavors, and smaller serving sizes, and it's repeatedly revamped its packaged foods to attract more health-conscious consumers.
Those efforts helped PepsiCo counter competition from private label brands and benefit from the secular shift toward healthier foods. They also enabled it to generate plenty of cash for buybacks and dividends.
PepsiCo's buybacks reduced its shares by about 4% over the past five years. It's also raised its dividend annually for 49 straight years, which means it's a Dividend Aristocrat which will be crowned as a Dividend King after just one more dividend hike. It pays a forward yield of 2.9%, and it spent 87% of its free cash flow on those payments over the past 12 months.
Wall Street expects PepsiCo's revenue and core earnings to rise 7% and 10%, respectively, this year. The stock trades at a reasonable 23 times forward earnings, and it delivered a total return of 60% over the past five years. Past performance doesn't guarantee future gains, but its well-diversified business should keep growing for years to come.
