AT&T (NYSE:T) pays a fantastic dividend, currently offering a 5.6% dividend yield. But income investors often look beyond the plain old yield to find even stronger dividend payers for the long run.
From that perspective, AT&T's generous yield might not be the best dividend play on the market today. We asked three Motley Fool contributors to weigh in on the matter to see if they could come up with three better income options.
From the rock-steady dividend growth at PepsiCo (NASDAQ:PEP) and the less predictable but equally impressive payout boosts at Texas Instruments (NASDAQ:TXN), to Verizon Communications' (NYSE:VZ) best-in-breed status in Ma Bell's own industry, there's no shortage of fantastic income stocks today. Here's the full report.
Tamara Walsh (PepsiCo): With a dividend yield north of 5%, AT&T seems like an obvious choice for income investors. However, the telecom giant's dividend lacks the critical component of growth that makes owning dividend stocks for many years so rewarding. AT&T's dividend has increased just 11.9% over the past five years, compared to a more than 45% spike in PepsiCo's dividend over the same period.
Dividend growth is important because it proves the company is well-positioned financially and willing to put its shareholders first. Therefore, I'd rather own shares of Pepsi today versus AT&T, because it offers a reliable dividend with the added bonus of continuously rising payouts. Not only has Pepsi paid a dividend every year since 1952, but it has also increased its payout for the past 42 years without fail. The soda and snack giant's latest dividend increase was to the tune of 15%, jumping up to $2.62 annually from $2.27 per share.
The stock now has a payout ratio of 53%, which tells investors that Pepsi returns 53% of its net income to shareholders. This means management still has ample cash left over to reinvest in growing the business. Moreover, the company had already returned a whopping $6 billion to shareholders through dividends and share repurchases when it announced its third-quarter fiscal 2014 results in October. Sure, Pepsi's dividend yield of 2.80% falls short of AT&T's yield. However, Pepsi's superior dividend growth will create much greater value for investors over the long haul.
Not to mention, with 22 brands in its snack business that each pull in annual sales north of $1 billion, Pepsi should have no problem continuing to grow its dividend well into the future.
Joe Tenebruso (Verizon): AT&T is a solid company with a safe and sizable dividend, but it's not my favorite dividend stock or even my favorite telecom stock. That title goes to Verizon.
Verizon is best-of-breed in its industry. It has built the strongest brand and the largest and most reliable network. And largely thanks to best-in-class availability rates for its wireless customers, it has the lowest subscriber churn and highest customer loyalty. Together, this has helped Verizon achieve greater levels of profitability than its competitors, and even helped the company earn the designation Most Admired telecom by Fortune magazine. Quite simply, AT&T's current dividend yield may be larger, but Verizon is the better business.
Looking ahead, Verizon offers investors a safe yet attractive play on increasing connectivity and rising data usage. Nearly a quarter of Verizon's wireless customers still don't have smartphones, and I expect that number to decline steadily in the years ahead. As Verizon's customers upgrade to more feature-rich phones, they will also need to upgrade their data plans -- leading to what I believe will be steady increases in revenue and profits for Verizon. And now, after its deal to acquire Vodafone's (NASDAQ:VOD) minority interest in Verizon Wireless, Verizon will reap the full rewards of that growth. That, in turn, should help the telecom titan improve its already-impressive cash flow generation, which I expect Verizon to pass on to its shareholders in the form of steadily rising dividend payouts.
But don't just take my word for it; legendary investor Warren Buffett also has Verizon in his crosshairs, with the Oracle of Omaha amassing a $700 million stake in the company. Foolish investors may wish to consider joining Buffett by building their own stakes in Verizon.
Anders Bylund (Texas Instruments): It's true that AT&T offers a fantastic dividend yield. But that doesn't automatically make it a fantastic income stock. Nine times out of ten, I'd rather own Texas Instruments as an income-generating machine. Here's why.
The best dividend stocks don't just rest on their laurels. They grow their payouts over the years. Adding that crucial growth component to the dividend mix is what unlocks the real magic of compound interest.
AT&T is an extremely mature business with strong cash generation, but it has hardly any growth left in it. The dividend policy follows suit. So, AT&T's payouts are large, but they've only doubled over the last 20 years. That translates into a compound average boost of just 3.8%.
By contrast, Texas Instruments has delivered a massive 1,500% dividend increase over the same period, or 14.9% a year. Here, I'll help you visualize the difference:
This rampant dividend growth helps Texas Instruments overcome the yield-busting effects of rising share prices. The stock has gained 1,060% in my two-decade period of study, while AT&T stopped at just 65%.
Let's say you bought 100 Texas Instruments shares at the start of 1995. That $7,350 investment would be worth $85,560 today -- or $116,337 if you reinvested the dividends in more shares along the way. The dividend checks on your 2,175 shares would add up to nearly $3,000 a year.
The same exercise for AT&T (then known as SBC Communications) would have resulted in a $12,160 holding today, or $28,400 with a strict dividend reinvestment strategy. Your 840 shares would have delivered just $1,550 in dividend checks last year. That's just a hair above half of what your Texas Instruments investment would be yielding all these years later.
Don't let AT&T's impressive yield trick you. In the long run, a combination of strong payouts and rapid growth like Texas Instruments will give you a much healthier retirement income.
That's the power of compound interest, squared.
Anders Bylund has no position in any stocks mentioned. Joe Tenebruso has no position in any stocks mentioned. Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends PepsiCo, Verizon Communications, and Vodafone. The Motley Fool owns shares of PepsiCo. 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.