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?
Alternatives: Verizon and China Mobile
Just to illustrate what else is out there, let’s take a look at two other solid, dividend-paying telecom stocks. Verizon Communications Inc. (NYSE:VZ) is one of the most widely held stocks in the market and is the most logical alternative to AT&T. Although Verizon has pulled back from its peak, its gains so far this year have been even greater than AT&T Inc. (NYSE:T)’s, and Verizon was a slightly lower dividend player to begin with. Verizon Communications Inc. (NYSE:VZ) pays 4.12% annually, which makes a significant difference from AT&T. Having said that, Verizon Communications Inc. (NYSE:VZ) may have more growth potential over the long run, as it has not capitalized on either its prepaid business or TV offerings as much as AT&T Inc. (NYSE:T) has.
China Mobile Ltd. (ADR) (NYSE:CHL) is actually the largest company mentioned here, and can be thought of as the AT&T of China. The largest mobile phone operator in the world with 703 million subscribers, China Mobile Ltd. (ADR) (NYSE:CHL) has some room for growth, but is pretty mature as a business. The main growth opportunity that I see is that the company is the only one of the three largest Chinese mobile phone companies that doesn’t offer Apple’s iPhone. If this were to happen, China Mobile Ltd. (ADR) (NYSE:CHL) would certainly pick up some new customers. Currently, the company is trading well below its peak and pays a 4.18% yield, but I would be hesitant to jump into this one unless it were to drop a little further in price. Among other things, the state-controlled nature of the company creates an added risk for U.S. investors, and should warrant additional compensation.
Last words
Stocks like these (high-yielding big companies) are bought for steady appreciation over a long period of time. With that in mind, know that you aren’t going to become rich overnight, but start paying attention to how yields of your favorite stocks fluctuate as the market moves. It won’t make you rich now, but making an effort to better time your dividend investments can make a big difference later on down the road. Of the three, I like AT&T Inc. (NYSE:T) the best for its excellent yield, which should continue to increase in coming years, and for their growing TV and prepaid operations.
The article In This Telecom, Yield Is Everything! originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile Ltd. (ADR) (NYSE:CHL). Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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