Investing in stocks requires careful analysis of the potential risks and returns. One way to evaluate a stock is to consider how it fits into your portfolio. For example, do you want a stock that pays regular dividends, grows in value over time, or protects you from market volatility?
Once you have a clear goal, you can compare different stocks that meet your criteria and choose the one that offers the best value.
One stock that many investors consider for its high dividend yield is AT&T (T 1.02%). The telecom giant pays a 6.68% dividend yield, trades at a low valuation, and is expected to improve its profitability and cash flow as it invests less in capital expenditures. However, AT&T stock may not be the best choice for some income investors.
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A possible alternative to AT&T is the Vanguard International High Dividend Yield Fund (VYMI 0.71%), or VYMI for short. This exchange-traded fund (ETF) invests in companies from developed and emerging markets that pay above-average dividends. The VYMI has a lower dividend yield than AT&T at 4.45% but offers several advantages over the single stock.
As an example of how to choose between different alternatives, here's a side-by-side comparison of AT&T and the VYMI.
AT&T vs. VYMI
AT&T stock is currently trading near a historically low valuation at 6.75x forward earnings. However, its dividend yield of 6.68% is largely consistent with its long-term average. Moreover, AT&T's dividend, albeit sizable, is well-covered by its earnings, with a payout ratio of 55.8%, and its profitability is expected to improve next year.
The main challenge for AT&T is its revenue growth. The wireless market is highly competitive and saturated, limiting AT&T's growth potential.
This unfavorable competitive dynamic has weighed on the company's stock performance over the past 10 years, with its shares falling by 36.3% over this period. What's more, the total return (pre-tax) for shareholders who reinvested the dividend over this time frame would have been an unimpressive 35.3%.
The VYMI is an ETF that invests in high-dividend-paying stocks from around the world, excluding the U.S. It tracks the FTSE Custom All-World ex US High Dividend Yield Net Tax Index and holds 1,329 stocks from various sectors and countries. The VYMI's top five holdings are Toyota Motor Corp., Shell, Novartis, Roche, and BHP Group.
The ETF has a low expense ratio of 0.22%, compared to its category average of 0.98%. The VYMI has delivered solid returns over the past decade, with its shares rising by 25.8%. If the quarterly dividend was reinvested, however, the total 10-year return would have been 72.8%. The ETF underperformed the S&P 500 over this period but still provided positive returns, with or without dividend reinvestment.
Verdict
For income-oriented investors, the VYMI seems to be a more attractive option than AT&T as it offers a higher probability of positive returns, without reinvesting the dividend. The VYMI also holds a diversified portfolio of international dividend-paying stocks, which reduces the risks associated with owning a single stock.
AT&T, on the other hand, may appeal more to traders or investors who want to use a covered call strategy to generate additional income, as it has a higher trading volume and a more active options market.
