These days, finding dividend payers that offer eye-popping yields is as easy as clicking the sort button on your favorite stock screener. Unfortunately, the vast majority of stocks that float to the top have underlying issues that could prevent them from maintaining their payouts.
In one way or another, interest rates that rose sharply are pressuring shares of AT&T (T 1.02%) and Ally Financial (ALLY 0.41%). The stocks are down about 25% and 32%, respectively, from peaks they set earlier this year.
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At recent prices, Ally Financial offers a mouthwatering yield of 5%, and AT&T offers an even more attractive 7.2% yield.
When you consider that the average stock in the Dow Jones Industrial Average offers a measly 2.2%, the above-average dividend yields these stocks offer should set off warning bells. Take a closer look, though, and you can see that these stocks have been beaten down further than they probably should have been.
AT&T
AT&T shares have been under pressure partly because the telecom giant is behind T-Mobile in the deployment of profitable 5G services. Investors are also concerned about the $138 billion in total debt on its balance sheet at the end of September.
T-Mobile's early investment in mid-band spectrum is working for its bottom line, but that isn't stopping AT&T's mobile business from growing. In the third quarter, the company recorded a 3.7% gain in mobility service revenue, and operating income from its mobility division reached an all-time high.
In addition to a steadily growing mobile business, AT&T is racking up heaps of new fiber internet subscribers. It's more than doubled its base of AT&T Fiber subscribers in less than four years to over 8 million at the moment. By the end of 2025, the company thinks it can pass 30 million fiber locations.
Over the past year, AT&T met its dividend commitment using less than half of the free cash flow its businesses generated. Despite rising interest expenses, the company recently raised its free-cash-flow expectation for 2023 to $16.5 billion. With predictable cash flows from mobile and fiber internet subscribers, a gently rising payout for at least a decade isn't an unrealistic expectation.
Ally Financial
A stock market nervous about the effects of soaring interest rates hasn't been kind to midsized banks like Ally Financial. This all-digital institution was once the financial arm of General Motors, and it still originates heaps of auto loans.
Higher interest rates and a weakened economy could pressure vehicle sales, but this hasn't happened yet. Ally Financial reported a record 3.7 million consumer auto applications during the three months ended Sept. 30.
Ally Financial had $140 billion in retail deposits at the end of September, and higher interest expenses are squeezing margins. The company also recorded much higher provisions for credit losses. Despite these challenges, Ally reported a healthy 9.9% return on equity in the third quarter, which was in line with the previous year's period.
So far, Ally Financial has weathered the storm created by higher rates and a slowing economy. Despite its encouraging performance, the bank stock has been trading for just 0.65 times its book value. Scooping up the shares at this low valuation gives you a great chance to realize market-beating gains in the coming decade.
