Why AT&T Is Perfect for Dividend Investors

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The chances are high that you've heard of AT&T (NYSE: T) as it's one of the world's largest telecommunications companies. It's also a financial powerhouse, raking in $170.8 billion in revenue in 2018 and throwing off a whopping $22.4 billion in free cash flow.

To be quite frank, AT&T stock isn't going to be at the top of any growth investor's list -- the company is expected to see its revenue grow by 7.8% in 2019 before slowing to just 0.4% in 2020. Moreover, it's not a stock investors can reliably count on for share-price appreciation, as the shares have effectively been trading sideways for years.

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But if you're a dividend-focused investor looking to put your capital to work to build a large and growing income stream, then AT&T is a really interesting stock. Allow me to explain.

Dividend resilience

At its current price, AT&T stock pays a dividend yield of about 6.45%. Moreover, that yield isn't some sort of unsustainable trap -- AT&T generates more than enough free cash flow to easily cover that yield as well as execute on its plan of paying down its sizable debt load. (AT&T has made a lot of sizable acquisitions over the years.)

AT&T also has a long track record of raising its dividend payments each year. Granted, those dividend raises haven't been particularly large in recent years -- the company has boosted its quarterly dividend by a penny each year for many years now. I also expect that when AT&T gets around to boosting its dividend early next year, it'll be another $0.01 per share jump.

Another thing to consider is that the business in which AT&T participates is quite dependable. Even in economic downturns, people are still going to need to use cell phones (AT&T is a major wireless carrier), they're still going to want to watch TV, and businesses are still going to need their wireline connections. That's not to say AT&T wouldn't suffer in a recession, but it'd still likely generate enough cash to fuel its dividend.

Indeed, for some perspective, AT&T's annual dividend payments currently work out to $2.04 per share. The company's free cash flow per share over the last 12 months came out to about $3.36. This means AT&T can, in theory, sustain its current dividend (or, frankly, an even larger one) even if its free cash flow were to see a significant, temporary decline.

Moreover, if you look at the trend in AT&T's free cash flow per share, you'll note that even during the financial crisis, that value stayed well above $2 per share.

AT&T is a resilient business, and that resilience should make it attractive to dividend investors.

A flat stock price isn't necessarily bad!

If you're investing in a stock like AT&T, then your investment objective probably isn't to multiply your money in a relatively short amount of time -- you're probably looking to build out a dependable stream of passive income. For a high-yielding stock like AT&T, a share price that effectively goes nowhere can actually be advantageous in that pursuit.

The idea goes something like this. Suppose you were to invest $500,000 in AT&T stock at $32 per share (slightly higher than what it's trading at as of this writing). At that share price, you'd be able to buy about 15,625 shares. Those shares would provide you with income of $32,211 per year. Now, suppose that AT&T stock doesn't budge, and over the next decade, you reinvest the dividends that you get from AT&T straight into more AT&T stock.

Also, for the sake of simplicity, suppose AT&T raises its quarterly dividend by $0.01 each year. Here's how such a hypothetical portfolio and dividend payment schedule would evolve over that time.

Year Number of Shares (rounded to the nearest tenth) Portfolio Value (Assuming AT&T stock stays at $32. Rounded to nearest dollar) Annual Income Stream (rounded to the nearest cent)
1 15,625 $500,000 $31,875
2 16,621.1 $531,875 $34,571.89
3 17,701.5 $566,432 $37,527.18
4 18,874.2 $603,975 $40,768.27
5 20,148.2 $644,742 $44,326.04
6 21,533.2 $689,062 $48,234.35
7 23,040.5 $737,296 $52,542.37
8 24,682.5 $789,840 $57,263.40
9 26,472.0 $847,103 $62,473.92
10 28,424.3 $909,578 $68,217.60

In just 10 years, a $500,000 investment would grow to more than $900,000, and the income the portfolio would generate would grow from less than $32,000 to more than $68,000 under these assumptions.

Now, keep in mind that inflation makes it so that a certain amount of money 10 years from now doesn't have the same purchasing power that the same amount of money would have today. Nevertheless, a high-yielding stock with a steadily increasing dividend and a relatively flat share price can still be interesting to the right kind of investor.

Investor takeaway

Dividend investing is great because it leverages the power of compounding to help investors build wealth over time. If dividend investing is something you're interested in, then AT&T, with its strong core business and large and growing dividend, is a dividend stock worth considering.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.