If you're a dividend investor, you've likely taken a close look at AT&T (T 1.02%) and Verizon Communications (VZ 1.17%) if you don't already own them.
These two telecom giants are classic blue-chip stocks. They're huge, seemingly stable companies that the economy depends on, and they crank out strong profits each quarter. Additionally, they both offer impressive dividend yields at the moment -- both around 7.5%.
However, those yields have risen not due to strong payout increases, but because the prices of both AT&T and Verizon stocks have steadily eroded. They've become yield traps, a dividend stock that looks good but only offers a high yield because the price has fallen as investors have decided it isn't worth owning.
As you can see from the chart below, both stocks have badly underperformed the market over the last few years.
While these stocks should bottom out eventually, investors who have predicted bottoms earlier have been made to look foolish, and just in the last two weeks, new risks have appeared on the horizon.
A Wall Street Journal investigation showed that both companies have left lead-sheathed cables around the country, allowing them to deteriorate and contaminate the drinking water, which is expected to lead to billions in penalties and fines. Meanwhile, Amazon just announced a new partnership with DISH Network to provide wireless service at $25/month forever, a move that could lower prices in the telecom industry.
If you're looking for high-yield dividend stocks, there are better bets than AT&T and Verizon right now. Let's look at two of them below.
1. KeyCorp
Regional banks have had a rough ride in 2023, but it's now clear that the impact of the crisis that sunk Silicon Valley Bank and a few others is limited in scope, setting up an opportunity for investors to buy high-yield regional bank stocks that are trading at a discount.
KeyCorp (KEY 0.62%), the parent of Key Bank, looks like a perfect candidate. The stock currently offers a dividend yield of 6.6%, and it looks set for a recovery after its latest earnings report. The Cleveland-based bank grew its deposits by $1 billion in the second quarter and kept charge-offs low at just 0.17% of loans, showing solid credit quality.
While net income was down by about 50% from the quarter a year ago as interest rates surged, the company looks like it's in a position to return to growth. Its loan book is growing with total loans up 10.6% to $120.7 billion, and though deposits are down slightly, the dividend looks safe based on its recent earnings and the recovery in the broader economy.
With the Federal Reserve nearly done raising interest rates, KeyCorp should benefit from a more stable interest rate environment as well as the broader economic recovery that seems to be afoot. Investors who buy the stock today can take advantage of both the 6.6% yield and the price appreciation that is likely to continue based on momentum from its Q2 earnings report.
2. 3M
3M (MMM 0.46%) has a number of similarities with AT&T and Verizon. It's another legacy blue-chip stock included in the Dow Jones Industrial Average, and, like the two telecom stocks, it's underperformed the market over the last several years.
3M is a diversified conglomerate across industrials, transportation, consumer goods, and healthcare (which will be spun out at the end of the year), and currently offers a dividend yield of 5.8%, and it has a few advantages over AT&T and Verizon.
The company is struggling in the current macroeconomic environment, but it offered some encouraging news in its Q2 earnings report as it raised its full-year earnings guidance, saying that cost-control efforts, including layoffs, had delivered better-than-expected results.
The company also recently reached a settlement on costly lawsuits over "forever chemicals" although challenges to that deal by some states remain.
Meanwhile, as a primarily cyclical company with exposure to industrial and consumer products, 3M should benefit from the economic recovery in a way that AT&T and Verizon will not.
Additionally, the upcoming spin-off of its healthcare unit should add value for shareholders as conglomerate break-ups have been popular with investors in recent years and will help streamline its business.
With a diverse range of products and exposure to cyclical tailwinds, 3M should have an easier time posting share-price gains than AT&T or Verizon in the coming years.
