by Dan Burrows | November 12, 2013 11:42 am
It’s hard to beat telecommunications stocks for retirement income, especially the bluest of the blue chips, because they aren’t going away — and hold the promise of market-beating returns over the long haul.
Yes, they’re slow-growth businesses and fairly boring stocks, but AT&T (T) and Verizon (VZ) — both members of the Dow Jones Industrial Average — are perfect stocks for retirement planning and retirees.
Past performance in never a guarantee of future returns, but if history is even a rough guide, T and VZ — thanks in no small part to their generous dividends — will inexorably outpace the S&P 500.
Indeed, over the last decade, T’s total return (price appreciation plus dividends) beats the broader market by more than 42 percentage points. VZ did even better. Its total return of nearly 186% clobbered the S&P 500 by 78 points:
Furthermore, at current levels, shares in both companies look attractively priced. AT&T and VZ’s valuations have both poised for superior long-term returns. T trades at a 12% discount to the broader market on a forward earnings basis, and it’s essentially in line with its own long-term average, according to data from Thomson Reuters Stock Reports.
Verizon isn’t as cheap as AT&T relative to the S&P 500 — offering a discount of 3% — but then, it has much better growth prospects than the broader market, which suggests the stock is a steal. Like AT&T, VZ also trades in line with its own long-term average on a forward earnings basis.
And don’t forget the dividends, which provide a steady income stream now and outsized total returns over the long haul as you progress into retirement.
AT&T is not only the reigning dividend champ of the Dow Industrials, it’s also one of the top 10 S&P 500 dividend stocks. The current yield on AT&T’s dividend is 5.1%.
To put that in perspective, we’re talking about a stock that’s as blue-chip as they come, and yet it competes favorably with junk bonds. That’s right: The yield on the super-risky Barclays Aggregate U.S. Corporate High Yield index is just 5.8%.
For risk-adjusted return, AT&T wins hands down.
The same can be said for Verizon and it’s own healthy dividend yield of 4.2%. AT&T is a low-risk stock in its own right, but Verizon is ever more so, with volatility about half that of AT&T.
With a beta of 0.16, VZ can be thought of as about 80% less volatile than the S&P 500. That means the risk of “buying high” is low.
Finally, AT&T and Verizon control more than 60% of the lucrative U.S. wireless market. Neither is going away, and — crucially — neither is content to stand pat.
Since the U.S. market is pretty much saturated, AT&T is seeking out a splashy acquisition in Europe. Meanwhile, after a decade or so of trying to make it happen, Verizon finally gained sole ownership of cash-cow Verizon Wireless.
The bottom line is that you can’t overlook these blue-chip dividend stalwarts when it comes to constructing or tending your retirement portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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