If you're on the hunt for a dividend stock with a yield above the 6% mark, you've probably crossed paths with both AT&T (T 1.02%) and Altria (MO -0.37%). AT&T is one of the largest wireless carriers in the U.S. and its stock sports a ginormous 6.84% yield at current levels. Altria, on the other hand, is a top U.S. tobacco company, and its shares offer a tantalizing 9.45% yield right now. Moreover, both companies offer shareholders meager top-line growth prospects, making their shares most appealing as a passive income play.
With this background in mind, let's dig deeper to find out which of these ultra-high-yield dividend stocks is the better buy.
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AT&T: A story about improving fundamentals
AT&T has been struggling to grow its revenue for years because of intense competition in the U.S. wireless carrier space. The buildout of its 5G and fiber networks has also been extremely costly, reflected by its massive debt position. It had net debt of $129 billion in the most recent quarter. AT&T, though, seems to be exiting one of the most tumultuous periods in its long life. The U.S. wireless carrier industry is starting to show clear signs of reaching a competitive equilibrium after a two-decade-long price war among the big three carriers.
As a result, AT&T, along with its closest competitors, ought to be able to ratchet up free cash flows, mainly through expense reductions, in the coming quarters, and evidence for this thesis is already starting to mount. In the most recent quarter, for example, AT&T posted a healthy 25% bump in free cash flow generation relative to the same period a year ago. So, with a reasonable payout ratio of only 55.8%, AT&T's dividend ought to be on safe ground. And with its shares trading at under 7 times projected earnings, the telecom company's shares are undeniably cheap.
Altria: A company in search of growth
Altria is facing its own set of challenges. The tobacco giant has been trying to diversify its revenue streams away from traditional cigarettes, which have been declining in popularity for decades. Over the past decade, Altria has invested in e-cigarettes, cannabis, and oral nicotine products, but none of these growth initiatives have been able to offset the decline in its core business. Speaking to this point, Altria's revenue fell by 4.1% year over year in the third quarter of 2023, relative to the same period a year ago.
Altria's dividend, however, remains attractive for income investors. The company has raised its payout 58 times in the prior 54 years, and it sports a reasonable payout ratio of 77.5%. With a long track record of rewarding loyal shareholders with regular cash distributions and a mid-tier payout ratio for a tobacco company, Altria's dividend screens as a safe bet. What's more, the tobacco company's stock is also trading at a relatively low valuation of 8.4 times forward earnings. In all, Altria stock offers an attractive mix of value and income.
Verdict
AT&T and Altria both screen as attractive dividend stocks for investors who prioritize income over growth. AT&T has a lower yield, but it also has a more favorable industrywide outlook. Altria has a markedly higher yield, but it also faces stiff regulatory and consumer headwinds that could erode its profitability in the years ahead. Thus, AT&T stands out as the better ultra-high-yield dividend stock to buy right now.
