It's not a universal law of the stock market, but often, a high-yielding dividend can indicate a high-risk investment. Smart, income-seeking investors should always consider the underlying fundamentals of a business to ensure it can support its payouts, whatever the stock is yielding.
And favoring dividend payers in unpredictable markets such as the one we're in is a smart strategy in itself. There's a lot to recommend companies that pay investors to own their shares, regardless of whether Wall Street fully recognizes the value of the business or whether or not its value appreciates.
At their current share prices, these two stocks pay dividends that yield over 3%, and should serve income investors well over the long haul.
Right out of the gate, I'm going to seemingly break the rule I laid out above, because AT&T (NYSE:T) is a high-yielding stock that seems to present those high-risk features I warned of.
First, in May, the telecom giant announced it was spinning off its WarnerMedia unit. That will then be merged with Discovery to create a new publicly traded media company. (It also spun off DirecTV.)
Then AT&T said it would trim by more than half the share of its free cash flow dedicated to its dividend. As a result of that payout cut, its yield will fall from its current level of about 7.6% to around 4.5% annually.
The move will also cost the telecom its place on the list of Dividend Aristocrats. AT&T had a 36-year record of increasing its dividend annually.
Last, T-Mobile (which closed its acquisition of Sprint in 2020) recently passed AT&T as the second-largest U.S. wireless carrier. Needless to say, it's been a tumultuous few months for AT&T's shareholders (a group which I am among).
But despite the market's trepidation, I'm actually quite bullish about this telecom's future. AT&T made some horrible blunders in recent years, overspending on acquisitions like DirecTV and Time Warner that did nothing for its bottom line.
Moving AT&T's entertainment assets and original content into a free-standing company will allow WarnerMedia to take on Netflix and Disney in the streaming wars unencumbered, while the telecom will be freed up to focus on the rollout of 5G networks that should boost its business through an upgrade supercycle.
Until that spinoff comes next year, investors will earn their 7.6% yield, and afterward, the payout will still be nothing to sneeze at. Shareholders will also acquire a stake in the new media company, and while its dividend is unlikely to fully make up for the shrinkage in AT&T's payout, it may prove a growth asset on its own.
If AT&T feels too risky for you, consider Realty Income (NYSE:O) -- a more safe, secure, and stable dividend payer with a yield of 4.2% annually at current share prices.
The commercial real estate investment trust (REIT) focuses on triple-net leases, so its tenants are responsible for the sites' taxes, maintenance, and insurance. Realty Income prides itself on paying its dividend monthly and even bills itself as "The Monthly Dividend Company." In fact, it has distributed 615 consecutive monthly payments to shareholders since its founding 52 years ago and has increased its payout 112 times since it was first listed on the NYSE in 1994, giving it Dividend Aristocrat status.
While commercial real estate can at times be a dicey business, Realty Income is built on long-term leases -- the average is almost 10 years -- with solid, financially stable tenants, over half of which are investment grade. Moreover, those tenants tend to be recession-resistant businesses, such as discount stores, drugstores, and supermarkets. There are some 300 companies in 50 different industries represented on its tenant roster, and no single company accounts for 10% or more of its revenue.
That proved beneficial during the pandemic because it didn't have to worry as much about rent collections, which never fell below 98% and had bounced back to 100% by July 2020, after which they barely wavered.
The combination of being a net lease REIT, which places the onus of property upkeep on the tenant, an investment-grade balance sheet of its own, and a stellar record of making regular and steadily rising dividend payments makes Realty Income a no-brainer stock to buy.