It's that time again for AT&T (NYSE: T) shareholders. AT&T recently declared its most recent quarterly dividend. On Nov. 3, the company will pay out $0.46 per share to shareholders of record at the close of business on Oct. 10. The quarterly dividend was raised to $0.46 -- up from $0.45 -- with the first payout of the year, in February.
AT&T is one of the premier dividend-paying stocks to choose from. It currently ranks as the highest-yielding stock in the Dow Jones Industrial Average, with a hefty 5.2% yield.
High current yield, low dividend growth
As investors well know, AT&T uses the bulk of its cash flow to reward shareholders with a high dividend. Even better, AT&T has a long track record of raising its payout over time. AT&T has increased its dividend for 30 years in a row, which demonstrates its commitment to returning a large portion of its cash flow to shareholders. AT&T typically raises its dividend at the end of the calendar year, so investors should look forward to another increase come December.
How much AT&T can, and will, raise its dividend is another question. It's worth considering that AT&T's dividend growth has slowed a bit during the past few years. AT&T's dividend bumps have been in the amount of $0.01 per share for the past six raises. The reason for this is that AT&T is a megacap that has reached the full maturity stage -- meaning it doesn't have much room for growth. AT&T's revenue grew just 1.9% in 2013. Free cash flow actually declined last year, from $19.7 billion in 2012 to $13.8 billion in 2013, due to higher capital expenditures and adjustments for pension liabilities.
This has put a limit on how much the company can raise its dividend, because AT&T already distributes much of its free cash flow. AT&T distributed 70% of its free cash flow to investors last year.
This trend has actually worsened to start 2014. Free cash flow totaled $5.2 billion during the first six months of this year, which is down from $8 billion through the same period last year. This was due to a $2 billion increase in capital expenditures during this time. Much of this has to do with AT&T's Project VIP, which was initiated two years ago as a massive, $14 billion capital spending plan to build out its IP and 4G LTE networks across the country.
Through the first half of 2014, AT&T paid $4.7 billion worth of dividends, meaning the company distributed 91% of its free cash flow.
Boiling it down
The major takeaway is that buying AT&T stock serves different purposes, depending on what type of investor you are. AT&T is perfectly suited for investors who need income right now, such as those in or nearing retirement. As previously mentioned, AT&T yields a nice 5.2%. Finding a profitable stock with that high of a yield is difficult. Typically, most stocks with that high of a yield are ones whose stock prices have declined significantly because they are in dangerous financial shape. AT&T generates more than enough cash flow to sustain its payout, and offer a modest increase every year.
Dividend growth investors may find AT&T a bit lacking. That's because its free cash flow has declined in recent periods due to significant capital spending designed to expand its network. AT&T is busily building out its U-Verse capabilities. All in all, AT&T distributes almost all of its cash flow, which means investors should expect another $0.01-per-share increase in its dividend come December. Once AT&T's massive spending initiatives are finalized, there may be room for greater dividend bumps down the road if future cash flow growth takes hold.
AT&T serves a valuable purpose for investors who need current income, and it's about to send a nice chunk of change to those investors. AT&T will pay its $0.46 per share dividend soon, and investors interested in the payout need to buy in no later than Oct. 7.
[Editor's note: Corrected article to reflect the proper date (10/7/14) by which shares must be bought to qualify for a quarterly dividend payout.]
Bob Ciura 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.