Will AT&T Remain the Dow's Dividend Champion?

The best dividend stocks give investors the valuable combination of current income and potential dividend growth in the future. For almost 30 years, telecom giant AT&T (T -1.37%) has delivered annual boosts in its payouts to shareholders and offers the best yield among the Dow Jones Industrials. That track record has earned AT&T a place among the exclusive companies on the list of Dividend Aristocrats. To become a member of this elite group, a company must have raised its dividend payouts to shareholders every single year for at least a quarter-century. Only a few dozen stocks manage to make the cut, and those that do tend to stay there for a long time.

During that three-decade span of higher dividends, AT&T has seen the telecom business transform itself completely. After having broken up into component regional telephone companies in the early 1980s, AT&T focused on long-distance service, which used to reap huge returns from what seem now to be astronomically high charges for landline calls. As long distance got more competitive, AT&T suffered, and the regional telecom formerly known as Southwestern Bell bought up the long-distance unit in 2005 and took the AT&T name. Let's take a closer look at AT&T to see whether it can sustain its long streak of rewarding dividend payouts to investors.

Dividend stats on AT&T

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

What's happened with AT&T lately?
AT&T's 5% yield has provided nearly all of the telecom giant's total returns over the past year, as the share price has actually dropped by less than half a percent since the middle of 2012. The lack of share-price appreciation points to the importance of dividends for income-producing stocks, but it also reflects the uncertainty investors have about how the company will find further growth.

Clearly, the biggest source of growth for AT&T in recent years has come from the explosion in smartphone use. By having been the original exclusive seller of the iPhone, AT&T locked in millions of early adopting customers seeking to get in on the mobile revolution. But eventually, competitors Verizon (VZ -0.68%) and Sprint Nextel (S) muscled in on the iPhone action. AT&T still led its rivals with 4.8 million iPhone activations in the first quarter of 2013, but sales of 4 million Verizon iPhones and 1.5 million Sprint-activated iPhones helped push AT&T's overall share of iPhone sales downward, continuing a trend that has seen its overall market share cut in half since the fourth quarter of 2010.

With AT&T having failed to get its proposed purchase of T-Mobile past antitrust regulators and with smartphone use having already gone through its fastest-growth phase in the U.S., the best growth prospects for AT&T lie elsewhere. Recently, rumors have surfaced of potential buyouts that could bolster AT&T's international presence. One involved the potential breakup of Vodafone, with Verizon seeking to take 100% control of its Verizon Wireless joint venture with Vodafone while AT&T would get Vodafone's foreign telecom assets. More recently, reports came out that AT&T was interested in buying a substantial stake in Spain's Telefonica. But talk is cheap, and so far, AT&T hasn't made any firm announcements in the international M&A arena.

AT&T Dividend data by YCharts.

As you can see, AT&T has been somewhat stingy with its dividend growth lately, having made only token $0.01 increases every year since 2009. High earnings-based dividend payout ratios ignore the fact that the telecom company's GAAP earnings reflect massive non-cash writedowns for depreciation and amortization of its extensive assets, and the much more plentiful free cash flow is sufficient to support AT&T's dividends.

When will AT&T raise its dividends again?
AT&T just raised its regular dividend in January, so you shouldn't expect an increase until 2014. If the company ends up making a large acquisition, however, the big question for dividend investors will be whether AT&T adds to its already extensive debt load, uses stock in a move that could greatly dilute existing shareholders, or decides to reduce its payout to conserve cash. Until a deal actually gets done, though, that conjecture is mere speculation, and AT&T looks primed to keep delivering the consistent dividends that make it the Dow's dividend champion well into the future.

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