It's no secret that buying, holding, and reinvesting payouts from America's largest dividend providers is the proven way to building a comfortable nest egg. Study after study has proven this, as have legions of retirees enjoying their golden years without worrying they will run out of money.
It could be easy to get sucked into buying shares of telecom giant AT&T (NYSE:T). Not only are there relatively high barriers to entry in AT&T's industry, but the company offers investors a whopping 5.1% yield and trades for just 14 times earnings -- a discount to the S&P 500 at today's levels.
But we're digging a little deeper to see if AT&T is the right stock for you. Below, Motley Fool contributors will tell you why they think Verizon (NYSE:VZ), Procter & Gamble (NYSE:PG), and Microsoft (NASDAQ:MSFT) are better options.
Brian Stoffel: Don't get me wrong, there's a lot to like about AT&T, but I think Verizon is an even better bet. This all boils down to two simple facts.
First, Verizon recently gained complete control of Verizon Wireless. Though Verizon paid a steep price to Vodafone (NASDAQ:VOD)$130 billion in cash and shares -- the purchase means Verizon is now the only company in the United States with a nationwide 4G LTE network. That's a big deal, and should help rake in tons of cash over the coming years.
Second, I believe Verizon's 4.3% payout is simply safer than AT&T's. The thing to know here is that dividends are paid out of free cash flow. If you look at how much Verizon is using to pay its dividend compared to AT&T, the point is clear.
Verizon's high payout ratio in 2012 was an anomaly, as most of that was the result of the company acquiring Verizon Wireless from Vodafone.
Discounting that, Verizon has consistently used less free cash flow than AT&T to pay out its dividend. That means it could continue paying it out if times get tough, and that there's more room for the dividend to grow in the future.
Tamara Walsh: When it comes to the best dividend stocks, I favor companies with long-standing track records of rewarding shareholders. For that reason, Procter & Gamble tops my list of best dividend stocks to own.
The consumer products maker has paid a dividend for 124 consecutive years, while AT&T has only had a payout for about a quarter of that time. What's more, P&G has increased its dividend for 58 consecutive years at a compound rate of more than 9% a year. This tells income investors the company is committed to creating shareholder value by growing its dividend.
The conglomerate increased its dividend 7% to $2.45 per share in fiscal 2014, and returned a whopping $6.9 billion in dividend payments during the year. But that's only part of the story. Management spent an additional $6 billion on share repurchases in fiscal 2014, for a total shareholder return of $12.9 billion in cash. If that seems like a lot, you're right. However, $12.9 billion in dividends and buybacks is more than reasonable for a company that generates $80 billion in sales each year.
Moreover, Procter & Gamble boasts one of the strongest portfolios of consumer products brands in the world today. This means it should not have any trouble generating loads of cash in the future. In fact, P&G has 23 brands that each generate between $1 billion and $10 billion annually. Ultimately, this should enable P&G to responsibly reward shareholders through dividend growth and share repurchases for many years to come.
Bob Ciura: I should preface my argument by first saying that AT&T does serve a purpose for income investors. Its 5.2% dividend yield provides nice income to those who need it now.
But AT&T leaves much to be desired for anyone with a longer time horizon than the next few years. That's because, with enough time, your income will be greater with a high-growth dividend stock than one like AT&T, which doesn't grow its dividend very much.
With that in mind, I would recommend Microsoft instead. At first glance, Microsoft's 2.6% dividend yield looks unimpressive. But the company more than makes up for this with far-superior dividend growth. Over the past five years, Microsoft has increased its dividend by 19% per year. By comparison, AT&T's five-year dividend growth stands at just 2%.
Owning Microsoft could ultimately result in more income down the road. Think about it this way: ten years from now, an investor who buys AT&T today will have a yield (on cost) of just 6.3%, assuming 2% annual dividend growth. If Microsoft maintains its dividend growth rate, that investor's yield (on cost) will be 6.7%. As a result, while AT&T satisfies an investor's need for income now, Microsoft is the far better option for anyone with a longer investing timeline.
Bob Ciura has no position in any stocks mentioned. Brian Stoffel has no position in any stocks mentioned. Tamara Rutter owns shares of Microsoft. The Motley Fool recommends Procter & Gamble and Vodafone. The Motley Fool owns shares of Microsoft. 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.