High dividend yields are attractive to investors. Who doesn't want a large stream of steady income? However, there's more to it than that, as there is an underlying asset to the dividend that could lose (or gain) value.
When searching for high-yielding stocks, one that immediately comes to the top of the list is AT&T (T -0.23%). The telecom giant underwent some business transformation over the past few years, but one thing has remained the same: a high dividend payout. So is AT&T stock a good one to buy for its dividend, or are there better options available? Let's find out.
AT&T's dividend is safe
AT&T has become a more focused business over the past few years. It spun out DirecTV to a private equity fund and WarnerMedia to Discovery, creating the new company Warner Bros. Discovery. Because those business segments were gone, AT&T didn't have the same level of profits, so it was forced to cut its dividend payment. However, the stock price adjusted, too, leaving the stock's generous 7.1% yield.
T Dividend Per Share (Quarterly) data by YCharts
Furthermore, this dividend is quite safe, as AT&T's dividend payout ratio from an earnings and free cash flow basis is 48% and 86%. This shows that AT&T can meet its dividend obligations, although it has little room to raise its payout levels.
Still, 7.1% is an impressive yield, and many investors would be forgiven for thinking this is guaranteed income. The problem is that AT&T's stock lost significant value over the past decade.
AT&T vastly underperformed the market over the past decade
Over the past decade, AT&T's stock is down 43%. However, the dividend payouts helped make up for the loss.
If you owned one share in 2013, you would have been paid $17.96 in dividends over the decade. When you receive a dividend, you have two choices: Pocket the cash or purchase more shares of the company.
If you decided to repurchase shares each time AT&T paid a dividend, you'd be up 23%. While that's not as atrocious a performance as a 40% decline, you would have been better off taking the dividends in a cash payment, as the stock declined from $26.87 to today's price. But with the $17.96 in dividends, you'd be up 25% on your investment.
Twenty-five percent in a decade isn't great, especially considering that the S&P 500 is up more than 220% in that time frame. While the S&P 500's dividend yield is only 1.5%, it's better to have a lower dividend yield with a better underlying asset.
T Total Return Level data by YCharts
When assessing a dividend-paying stock, one of the most important items to analyze is its total return, which includes the dividend yield and stock performance. This will give investors a more accurate picture of how the company has performed over the long term and keep you from getting burned by an asset that is losing value.
AT&T hasn't performed well over the past decade, and there's nothing I see now that could turn around the company and make it a stock worth investing in. So even though the dividend yield is appealing, it's best to avoid the stock.
