After the tremendous gains during the first five months of 2013, I had to re-think some of my favorite dividend stocks. Some became so highly priced that the dividend yield shrunk too much to make an investment worthwhile. A great example of this is AT&T Inc. (NYSE:T), which rose to as high as $39 at its peak, at which point its dividend yield had dropped to 4.6%. Now, after a significant pullback of about 9%, AT&T’s yield is back up to over 5%, and I feel like it’s worth a look before earnings are released on Tuesday, July 23. Let’s take a look at why the yield makes all of the difference, and why AT&T Inc. (NYSE:T) is better than its alternatives right now.
A brief snapshot of AT&T
AT&T Inc. (NYSE:T) is the largest provider of both mobile and fixed telephone services in the United States, and has recently begun to venture into broadband television services through its U-Verse products. AT&T has expanded its mobile services significantly over the years through several acquisitions, starting with the absorption of Cingular Wireless as a result of the acquisition of Bell South in 2006, followed by NextWave Wireless in 2012, and the pending acquisition of the Alltel brand announced earlier this year.
Going forward, AT&T still has room to grow its prepaid business, which is evidenced by its recent agreement to purchase Leap Wireless which has about 5 million prepaid wireless subscribers. The U-Verse service has also been catching on tremendously, and the revenues generated by the service are up 32% year-over-year to $2.7 billion. However, this is still a small fraction of AT&T Inc. (NYSE:T)’s $127 billion in annual sales.
4.6% vs. 5.0%: Does it really matter?
Aside from my positive opinions of AT&T as a company, my true purpose in this article is to emphasize the importance of small differences in dividend yields, and for investors to recognize when good entry points in dividend stocks have passed. While the difference in dividend yield from AT&T Inc. (NYSE:T)’s peak to the present is just 0.4%, this can make a tremendous difference over a long period of time.
Let’s say, for sake of argument, that you have $100,000 to invest, and that you are 30 years away from retirement. Let’s say the stocks in your portfolio gain (on average) about 6% in share price, and that you reinvest all dividends, which you should be doing anyways. If the average stock in your portfolio pays a 4.6% dividend yield, you would wind up with $2,054,252 after 30 years. An average yield of 5% raises the total to $2,289,230, or $234,977 more than the portfolio that yields just 0.4% less! In other words, this small difference in yield could produce more than 11% difference in the end result. Not so insignificant anymore, right?