Telecom giant AT&T (T 0.86%) has a very simple story now that it's shed its ambitions to become a media conglomerate. The core business is wireless, which will grow slowly at best. The secondary business is fiber internet, which is now growing quickly enough to offset declining revenue from legacy infrastructure.

AT&T's growth will impress no one, but the company is a cash machine that pays a generous, sustainable dividend. Dividends are important for long-term investors. Since 1960, nearly 70% of the total return of the S&P 500 index was driven by reinvested dividends. Quick capital gains are great, but dividends are the key to successful investing over decades.

A solid wireless business

AT&T ended 2022 with 217.4 million wireless subscriptions, including 69.6 million postpaid phone subscribers, 19.2 million prepaid subscribers, 6 million reseller subscribers, and 107.5 million connected devices. The company gained 2.9 million net postpaid phone subscribers in 2022, adding to a 3.2 million boost in 2021.

Growth is slowing in 2023, the result of an economic environment that's putting pressure on consumers. The company added just 424,000 net postpaid phone subscribers in the first quarter, which puts it on a pace well below that of 2022. Equipment revenue also slumped, a sign that consumers are pushing back smartphone upgrades. Global smartphone shipments tumbled 14.6% year over year in the first quarter, according to IDC.

Despite the slowdown, wireless remains a hugely profitable business for AT&T. The company generated $20.6 billion in wireless revenue in the first quarter, along with $6.3 billion in operating income. That's good for an operating margin above 30%.

Fiber growth

AT&T has about 13.9 million consumer broadband and DSL subscriptions, a number that's in decline. However, more than half of this total is now fiber. AT&T is building out its fiber network in areas that it already serves, and it's using a joint venture called Gigapower to expand beyond its traditional service areas.

The company added 272,000 net fiber connections in the first quarter, bringing the total to 7.5 million. Around 25 million locations are now passed by AT&T's fiber network, putting penetration at about 38%. Each customer who signs on pays $65.92 per month on average, which is about $10 higher than the postpaid wireless business.

Fiber is a much smaller business for AT&T than wireless, generating just $1.45 billion in revenue during the first quarter. But fiber revenue has plenty of room to grow as the company expands its network.

Free cash flow and the dividend

AT&T expects to generate at least $16 billion in free cash flow in 2023. The company is valued at $115 billion, which puts the price-to-free-cash-flow ratio just above 7. This is a slow-growing company, so it certainly doesn't deserve a premium valuation. Still, AT&T's valuation has an incredible amount of pessimism baked in.

The dividend will consume about $8.4 billion over the next year, or about 52% of that free cash flow. That leaves plenty free cash flow left over for debt reduction. Dividend growth will likely be minimal for now as AT&T works its way through a tough environment, but as free cash flow rises in the future, the dividend can rise as well.

AT&T's dividend now yields nearly 7%. Take that dividend and reinvest it in more AT&T shares over time, and the stock won't need to do much more than tread water for an investor to achieve a solid return. While AT&T stock isn't very exciting, it deserves a place in your portfolio.