If your priority is to receive a stable and recurring dividend, a good idea is to focus on businesses that aren’t trying to do too much. When a company tries to grow its business while also paying a dividend, it can be difficult to juggle both.
Good examples of that are Intel and Walgreens Boots Alliance. Intel is trying to build a chip foundry business, which has proven to be a significant challenge, ultimately resulting in the tech company suspending its dividend. Walgreens, meanwhile, has been trying to expand into healthcare, which is no easy task, either. And it ended up slashing its payout nearly in half at the start of the year.
When it comes to dividends, the best stocks to own are the ones whose businesses try to keep things simple. For a while, AT&T (NYSE: T) was looking like it might be a bad dividend stock when it was trying to grow aggressively into the streaming business with its acquisition of Time Warner. When it eventually gave up on that idea, it became a better dividend stock.
Now, with its latest move, it may be an even better one. Let’s see why.
AT&T is selling its stake in DirecTV
Last month, AT&T announced it would be selling the 70% stake it has in DirecTV to TPG, a private equity firm, for $7.6 billion. The move gets AT&T out of a competitive pay-TV business. At a time when viewers have more options than ever before for content, including myriad streaming options, simplifying its operations and focusing on its core telecom business could be a huge win for the company and AT&T shareholders.
Plus, the influx of cash can go a long way in helping AT&T strengthen its balance sheet by paying off some debt. As of the end of June, the company had a whopping $130.6 billion in debt on its books. Telecom companies normally carry a lot of debt on their books due to the capital-intensive nature of their operations, but with interest rates remaining high, that has been a reason for investors to be extra cautious with respect to these types of stocks. By injecting some additional cash into its operations, AT&T can reduce some of its debt and thus bring down some of that risk.
Could this pave the way for a dividend increase?
One thing investors may want to keep watching for is whether AT&T increases its dividend. The company is arguably already in a strong enough position to justify a boost to its payout, and now the sale of its stake in DirecTV might incentivize management to give investors more of a reason to buy the stock as it narrows its business.
Since spinning off WarnerMedia and adjusting its dividend in 2022, AT&T hasn’t increased its payout, and a hike may be overdue. Historically, AT&T was known to be a dividend growth stock and it may be waiting for the right time to announce an increase and to start that cycle again. Many telecom stocks often raise their payouts to give investors a reason to buy and hold.
Currently, AT&T has a payout ratio of 64% and over the trailing 12 months it has accumulated $21 billion in free cash flow, which is far more than the $8.2 billion it has paid out in dividends during that stretch. The dividend looks incredibly safe today and the sale of DirecTV could allow AT&T to better allocate resources to its fiber business and grow the dividend.
Should you buy AT&T stock today?
AT&T’s stock has rallied 27% this year as investors have grown more bullish on its future given its stronger results of late. Its yield has shrunk as a result, and is now down to around 5.2%. However, that’s still well above the S&P 500 average of 1.3%. As interest rates come down, more investors could load up on this high-yielding stock, which means this high of a yield may not last for long.
If you want a good dividend, then AT&T can make for a solid stock to add to your portfolio. By simplifying its operations and adding some cash, it looks like a much safer income investment to buy and hold. And it may only be a matter of time before the company announces an increase to its payout.
Should you invest $1,000 in AT&T right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Why AT&T May Have Just Become an Even Better Dividend Stock to Own was originally published by The Motley Fool
