Dividends Driving Value for Dow's Telecom Giants

AT&T and Verizon Communications have used dividends to create a market beating investment.

Travis Hoium
Travis Hoium
Jul 15, 2014 at 3:30PM

The stock market is in the midst of earnings season, and investors are getting a look at how their companies did in the second quarter. But another thing companies are announcing is quarterly dividends, which are a huge part of the returns investors get in the Dow Jones Industrial Average (DJINDICES:^DJI).

Two of the biggest dividends on the Dow are AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), which currently yield 5.2% and 4.3%, respectively, for investors. These dividend payments are what have created market-beating returns for investors.

A dividend's big impact on returns
Over the past decade, neither AT&T nor Verizon Communications has beaten the Dow Jones Industrial Average without dividends included.

T Chart

T data by YCharts.

But when you include dividends, the story changes dramatically. Both AT&T and Verizon have beaten the Dow soundly for investors who have reinvested dividends.

T Total Return Price Chart

T Total Return Price data by YCharts.

When looking at returns, it's key to understand the role dividends play. Looking at stock price alone isn't enough, especially for high-yielding stocks, which both of these telecom giants have become.

Why these are rock-solid dividends
The fact that these companies pay dividends is good, but what's more important in the long term is the consistency with which they'll be able to continue paying them. On that front, both companies are in good shape.

The companies' wireless businesses and emerging fiber-optics businesses are based on building large networks that cost tens of billions of dollars. This creates a competitive moat that keeps out competitors; thus would-be rivals like T-Mobile and Sprint have to compete on prices instead of network size and quality.

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Because mobile phones are a high-demand item, AT&T and Verizon are also able to command high prices and therefore high margins. Last year, their operating margins were 23.7% and 26.5%, respectively. Those high margins keep them profitable and keep dividends flowing to investors.

Seeking dividends is a great way to start your search for market-beating investments, and both yield and quality are important in the long term. That high yield and consistency of dividends have helped AT&T and Verizon beat the Dow over the past decade, and they're a good bet to do it again in the next decade.