Vodafone vs. AT&T: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, let's pit two of the world's largest telecom companies in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Established in 1991, London-based Vodafone (VOD 1.05%) is the world's second-largest telecom operator by subscribers and net revenue. The company has a global presence, with equity interests in more than 30 countries and partner networks in more than 50. Vodafone is primarily focused on European markets, where it generates 70% of its revenue, but the company also offers telecom and IT services to corporate clients in more than 65 countries.

Founded in 1983 in the aftermath of a landmark antitrust case, AT&T (T 0.18%) is the largest mobile and fixed telephony services provider in the U.S. Originally divested as Southwestern Bell, today's AT&T is a combination of that company and the AT&T that remained after the antitrust case. The company provides mobile voice and data services to over 107 million subscribers, and also offers broadband, cable TV, and other services to millions of Americans. AT&T has recently been rumored to be considering an acquisition of Vodafone, which does appear to give it an early edge before we even get started in our analysis.

Source: Morningstar and YCharts. *Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round 1: Endurance (dividend-paying streak)
According to Dividata, Vodafone (formerly known as Racal Telecom) began paying dividends in 1989, and has been paying out ever since. But Vodafone's 25-year dividend streak can't hold a candle to AT&T, whose dividend history dates all the way back to 1893. An uninterrupted dividend streak of 120 years lets AT&T take the endurance crown without breaking a sweat.

Winner: AT&T, 1-0.

Round 2: Stability (dividend-raising streak)
Vodafone's dividend payouts fell in 2008 and 2009 due to the financial crisis, according to Dividata, so therefore the telecom giant has only been increasing its dividend since 2010. In contrast, AT&T has been raising its dividend payouts since 1959, resulting in a 55-year dividend-raising streak -- an easy win for the American telecom contender.

Winner: AT&T, 2-0.

Round 3: Power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

VOD Dividend Yield (TTM) data by YCharts.

Winner: Vodafone, 1-2.

Round 4: Strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

VOD Dividend data by YCharts.

Winner: Vodafone, 2-2.

Round 5: Flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better. YCharts has a tough time rendering the free cash flow payout ratio of foreign companies, but according to Morningstar, Vodafone's trailing-12-month payout ratio is 260%! That's far less sustainable than AT&T's latest reported free cash flow payout ratio of 61.8%, so the American telecom takes the lead for good in the final round.

Winner: AT&T, 3-2.

Bonus round: Opportunities and threats
AT&T may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Vodafone's opportunities:

• Verizon will acquire Vodafone's 45% stake in Verizon Wireless for $130 billion.
• Project Spring will strengthen its broadband and mobile services across Europe.
• The company has acquired Britain's Cable & Wireless Worldwide and Germany's Kabel Deutschland Holding.
• It rolled out an unlimited voice and data plan for frequent smartphone users.

AT&T's opportunities:

• The company has been looking for acquisitions internationally, especially in Europe.
• AT&T might even acquire Europe's largest mobile carrier, Vodafone.
• The telecom has been mulling a bid for more spectrum to enhance wireless services.
• It recently acquired Leap Wireless' prepaid Cricket service for $1.2 billion.
• The company recently announced a new mobile upgrade plan called AT&T Next.
• AT&T's strengthening its LTE coverage through its Project Velocity IP program.

Threats to Vodafone:

• Deutsche Telekom is investing heavily in high-performance infrastructure in Germany.
• Vodafone already relies on Deutsche Telekom's telecommunication network for wireline services.
• Vodafone withdrew from consideration for two telecom licenses in Myanmar.

Threats to AT&T:

• T-Mobile and Verizon rolled out competitive mobile upgrade plans.  
• Al Jazeera has filed a lawsuit against AT&T for cancelling a contract to carry Current TV.
• Sprint plans to upgrade its infrastructure and deploy its own LTE networks in the U.S.

One dividend to rule them all
In this writer's humble opinion, it seems that AT&T has a better shot at long-term outperformance, thanks to its aggressive expansion plans and its history of providing innovative, reliable, high-quality products and services for more than a century. Vodafone, on the other hand, might find itself acquired by AT&T, since it has been facing severe headwinds in the European markets. The end result for an investment in either company might be a steady stream of AT&T's dividends. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!