Lately, I’ve been focusing on “no drama” dividend stocks like Campbell Soup Company (NYSE: CPB) and moderate yielding but consistently growing dividend stocks like Flowers Foods (NYSE: FLO).
A portfolio of stable, steady-eddy dividend stocks like these forms a great backbone for a retirement nest egg, as they pay competitive dividends that generally rise at a quicker pace than the rate of inflation.
But sometimes, you just want raw yield.
And today, we’re going to look at one of the highest-yielding stocks in the S&P 500, AT&T Inc. (NYSE: T). At current prices, the AT&T dividend yields a fat 7.4%.
AT&T is best known as a phone and internet service company, but it’s more than that. Management was smart enough to see the handwriting on the wall that voice and data services have largely become commoditized. In the minds of most consumers, one phone provider is as good as the next, and it becomes a race-to-the-bottom price war.
This is why AT&T bought Time Warner and repositioned itself as a content company. AT&T now controls HBO, including its direct-to-consumer HBO Max service, as well as TBS, TNT, CNN and other networks.
AT&T’s Dividend Outlook
You might think that a utility-like mobile phone company would be pretty close to pandemic-proof. But even AT&T ran into trouble due to lower business subscribers and lower international roaming fees due to less travel. And the lack of new releases since March really took a bite out of WarnerMedia’s movie business.
But it’s important to remember that these are temporary setbacks, and longer-term trends are favorable. AT&T has chipped away at the debt load it took on for the Warner purchase, and each dollar of debt paid down frees up the company to increase its dividend or buy back shares.
In AT&T, we’re not getting a lot of dividend growth these days. The company has raised its dividend by a whopping one cent per share annually since 2008. But I believe more robust dividend growth is coming in the next few years as the company deleverages. In the meantime, we’re collecting a nice 7.4% in current income.
AT&T is the definition of a middle-of-the-pack in our Green Zone Ratings system. It sports an overall score of 47 out of 100.
AT&T’s Green Zone Rating on November 10, 2020.
That’s pretty typical. It’s unusual for high-yield stocks to score high in the Green Zone system because they often lose points for momentum and growth.
But, just for grins, let’s drill down to see how AT&T scores in each category.
Value — AT&T rates really high on value, coming in at 87. By our metrics, only 13% of all stocks in our universe are cheaper.
Value investing has been a lost cause over the past decade, which makes the Green Zone approach so attractive for a few reasons:
- We include value in the calculations.
- But we also include momentum, quality and growth factors.
This helps us to steer clear of value traps or stocks that look cheap on paper but have declining fundamentals.
Volatility — AT&T also rates well on volatility, scoring a 67. Remember, volatility is bad, so a high score here implies low volatility. Even though AT&T is a budding content stock along the lines of Disney or Netflix, investors seem to trade it like a boring, old utility stock. That’s fine with me.
Quality — AT&T rates well on quality, scoring a 65. Our quality score is based primarily on profitability and on balance sheet management. AT&T doesn’t have exceptionally high margins by any stretch of the imagination, but it wins points for being consistent.
Growth — AT&T starts to drift into middle-of-the-pack territory in growth, rating a 58. That’s not bad, mind you. It still puts AT&T in the top half of all companies. But we need to remember that we’re looking at AT&T for its yield, not for its growth potential. Growth is the icing on the cake.
Momentum — The company scores poorly on momentum, coming in at 21. The shares took a hit in March and have yet to really get their mojo back. Again, this is to be expected. It’s rare to find stocks that rate highly on both our value and momentum. They exist, of course. But those are your proverbial unicorns, and AT&T is not one of them.
Size — AT&T is a large company, and it’s one of the oldest in the S&P 500. It’s not on par with an Apple or Amazon based on size, but it’s very much a large-cap stock. So, we’re not going to benefit from the historical outperformance of small caps here. It scores a 1.
Bottom line: Again, AT&T’s overall Green Zone Rating isn’t particularly impressive. It’s an average company. But stocks in this Neutral range tend to at least keep pace with the S&P 500 over time. So, in AT&T, we get a stock that should, over time, give us returns in line with the broader market while also paying a fat dividend.
Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Follow Charles on Twitter @CharlesSizemore.