Does your portfolio need dividends? Nice, fat dividends? If so, you need AT&T Inc. (NYSE:T) in your portfolio. AT&T stock is an income mainstay.
T stock has a steady record of paying dividends going back decades since the “Baby Bells” it is composed of split off from the old AT&T in 1984. (They re-took the old AT&T long-distance company, and its name, in 2005.)
Even during the worst financial problems, after the dot-com collapse of 2001 and the financial collapse of 2008, AT&T kept paying shareholders.
The most recent dividend on AT&T was 48 cents per share, paid in October, and it represented 1.22% of the stock price at that time. This was slightly more than the 54 cents per share of net income recorded during the third quarter. But even in years when it doesn’t cover the dividend with income, as in 2014, the AT&T dividend still comes on time, and the rate hasn’t fallen once since 2005.
This makes T stock a classic yield stock: one you buy for income and not capital gains. You want to get it when analysts are saying don’t, and you want to hold it.
AT&T stock, in short, is the king of a dividend investor’s portfolio.
Wireless Is Why AT&T Stock Works
T stock has an enormous balance sheet, with over $400 billion in assets, and operating cash flow of over $25 billion per year, which lets it both pay the dividend and set long-term plans.
The cash comes from wireless services. AT&T got into wireless over 20 years ago, buying McCaw Cellular for $12.6 billion in 1994. It’s one of the greatest financial coups of all time. Since the regional Bells were also granted cellular licenses, the McCaw deal helped give T a national footprint before any rivals.
Wireless cash flow has compensated for the slide in the wired business. Today’s AT&T started as SBC Communications, but over time, it bought BellSouth, Ameritech and Pacific Bell. These are no longer great businesses to be in. No matter, T used their profits to get into better businesses, not just cellular but broadcast satellite, closing its $48.5 billion purchase of DirecTv in 2015.
T’s Vertical Integration: Own the Content and Pay Yourself
Comcast Corporation (NASDAQ:CMCSA) has owned all of NBC-Universal since 2013, having bought it in two gulps from General Electric Company (NYSE:GE). So AT&T believes it has a natural complement to DirecTv and its wireless business in Time Warner Inc (NYSE:TWX), which it agreed to buy in October for $85 billion.
The Time Warner deal completes T’s transition from a phone company to a video company, a transition that has been underway online for over 20 years. AT&T has upgraded some wired assets into something more like cable television, under the name UVerse, and it has even installed fiber past some homes to deliver 1-gigabit-per-second services that are far more than any TV watcher needs. But the key to its future remains wireless.
Completion of the Time Warner deal next year would not only let it “pay itself” for much of DirecTv’s programming, but “zero rate” that programming on its cellular network, delivering it free at no additional cost. The result would be even more vertical integration than what Comcast enjoys, and a clear path toward paying those dividends into the future.
When Should You Buy T Stock?
Right now, you can get a yield of 4.85% buying AT&T stock, even though it has delivered a 10% capital gain in just the last month as analysts have warmed to it.
But in general, you don’t want to seek capital gains with T, which means you don’t want to chase it. It traded higher almost 10 years ago, and its fate will fluctuate along with the market’s appetite for dividends.
As interest rates rise, in other words, expect the price of AT&T stock to fall, raising its yield and making it an even better deal for dividend investors.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GE.