You won't find a higher yielding dividend stock in the Dow Jones Industrials (DJINDICES:^DJI) than AT&T (NYSE:T), as the telecom giant has been among the stock market's top dividend payers for years now. Yet before you conclude that AT&T is the perfect stock for every income investor's portfolio, there are some things that you need to understand both about how AT&T finances its dividend payments and what the future is likely to bring for shareholders. In particular, the sustainability of AT&T's dividends relies on some factors that are far from sure things for AT&T to achieve. Let's look more closely at two things every dividend investor should know about AT&T right now.
1. AT&T is a low-growth Dividend Aristocrat
In addition to its huge yield, AT&T also distinguishes itself by qualifying as a Dividend Aristocrat, with a 30-year history of boosting its payout annually that dates back to the company's days as the successor of regional telecom operating company Southwestern Bell. With just a few dozen companies qualifying for the honor of being Dividend Aristocrats, AT&T's elite status makes it an attractive find for many dividend investors.
Yet when you look at the pace of AT&T's dividend growth recently, it's hard to get nearly as excited about the stock:
For the past six years, AT&T has contented itself with a tiny penny-per-share annual increase in its quarterly dividend payment. That amounts to just 2% to 2.5% per year in dividend increases, which is well short of the 5% to 10% pace that many higher-growth Dividend Aristocrats manage to give their shareholders.
You can find several reasons why AT&T hasn't been better about raising its dividend. First, with the need for massive investments in network infrastructure, AT&T can't afford to distribute all of its cash flow in the form of dividends. Moreover, with the need to make acquisitions like the planned buyout of DirecTV (NYSE:DTV.DL) in order to spur growth, AT&T has to hang onto some of its cash hoard in order to avoid taking on too much debt. With much of the DirecTV merger being financed with new AT&T shares, the amount of cash used for dividends will only rise after the deal is finalized, and that could put further pressure on dividend growth in the future.
2. AT&T could see substantial pressure from a price war
The telecom industry has a history of price wars, and they've wrought havoc among its major players in the past. Younger investors won't remember AT&T's long-distance history, but the company has a long track record of having to defend its core business against attack from competitors. Back when per-minute charges for long distance were ubiquitous and made simple phone calls extremely expensive, AT&T had to face off against up-and-coming rivals MCI and Sprint (NYSE:S) as they sought to provide cheaper long-distance service. In the end, MCI went bankrupt, the old AT&T merged with SBC, and now, just about every landline provider in the U.S. offers fixed-rate monthly calling plans that include unlimited calling across the nation or even internationally as part of the overall package.
Now, AT&T faces some of the same challenges in the wireless network world. Even as it spends billions to improve the quality of its network, AT&T has had to deal with price competition from Sprint and T-Mobile (NASDAQ:TMUS) that has forced it to respond by reducing its own monthly plan charges. Some of the moves that AT&T has made to encourage movement away from costly smartphone subsidies toward installment payment plans has helped the telecom's bottom line, but given the amounts that competitors have been willing to pay to lure AT&T customers away from the company, keeping its profit margins high will be an ongoing struggle going forward.
On the whole, AT&T investors have had little to complain about from their stock holdings, given the consistent, plentiful income the company generates. In the future, though, shareholders in AT&T will have to keep their eyes on the company's strategic vision in order to make sure that it doesn't squander the prolific cash flow that its operations generate. Without smart management, AT&T could eventually see the positive traits that have given it such a strong dividend in the first place start to disappear.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.