If your priority is to receive a stable and recurring dividend, it’s a good idea to focus on companies that aren’t trying to do too much. When a company is trying to grow its business and pay dividends at the same time, it can be difficult to balance the two.
Good examples of this are Intel And Walgreens Boots Alliance. Intel is trying to build a chip foundry business, which has proven to be a significant challenge, ultimately leading to the tech company suspending its dividend. Walgreens, meanwhile, is trying to expand into healthcare, which is also no easy task. And in the end, the payout was almost halved at the beginning of the year.
When it comes to dividends, the best stocks to own are those whose operations try to keep things simple. For a while, AT&T (NYSE:T) looked like it might be a bad dividend stock when it tried to aggressively grow in the streaming sector with the acquisition of Time Warner. When it finally gave up on that idea, it became a better dividend stock.
Now, with his latest move, it could be an even better move. Let’s see why.
AT&T is selling its stake in DirecTV
Last month, AT&T announced it would sell its 70% stake in DirecTV TPGa private equity firm, for $7.6 billion. The move pushes AT&T out of a competitive pay-TV industry. At a time when viewers have more options than ever before for content, including numerous streaming options, simplifying operations and focusing on its core telecom business could be a huge win for the company and AT&T shareholders.
Additionally, the influx of cash could go a long way in strengthening AT&T’s balance sheet by paying down some of its debt. At 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 businesses, but with interest rates remaining high, this has prompted investors to be extra cautious with these types of stocks. By injecting some additional cash into its operations, AT&T can reduce some of its debt and thus reduce some of that risk.
Could this pave the way for a dividend increase?
One thing investors may want to continue paying attention to is whether AT&T increases its dividend. The company is arguably already in a strong enough position to warrant an increase in its payout, and now selling its stake in DirecTV could incentivize management to give investors more reason to buy the stock, as the company downsizes its operations.
Since spinning off WarnerMedia and adjusting its dividend in 2022, AT&T has not increased its payout, and an increase may be too late. Historically, AT&T has been known as a dividend growth stock and it may be waiting for the right time to announce a raise and restart that cycle. Many telecom stocks often increase their payouts to give investors a reason to buy and hold.
Currently, AT&T has a payout ratio of 64% and over the last twelve months it has accrued $21 billion in free cash flow, which is far more than the $8.2 billion it paid out in dividends in that period. 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?
Shares of AT&T are up 27% this year as investors have become more positive about the future given stronger results of late. The return has therefore fallen and is now approximately 5.2%. However, that is still well above S&P500 average 1.3%. As interest rates fall, more investors could buy these high-yield stocks, meaning these high returns may not last long.
If you want a good dividend, AT&T can make for a solid stock to add to your portfolio. By simplifying operations and adding some cash, it seems 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 in the payout.
Should You Invest $1,000 in AT&T Now?
Consider the following before buying stock in AT&T:
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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 become an even better dividend stock to own was originally published by The Motley Fool
