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The Western Union Company (WU), Philip Morris International Inc. (PM): Goldman Sachs Group, Inc. (GS)’s Dividend Picks

At 11% annual dividend growth over the next decade Philip Morris International Inc. (NYSE:PM) stock would be worth about $131 per share today, a 38% premium to the current price. The minimum dividend growth rate required for the stock to be fairly valued is just 6.8%, and the company should be able to handle that easily.

Because Lorillard has a much higher yield its dividend growth doesn’t need to be as fast. Both stocks are fantastic dividend growth stocks, but since having two cigarette stocks in The Ultimate Dividend Growth Portfolio seems like overkill, I’ll stick with Lorillard for now. But either one would be a good position to have.

The problem with telecoms

Goldman Sachs Group, Inc. (NYSE:GS) also recommends AT&T Inc. (NYSE:T), a standard dividend stock for many years. But I don’t like AT&T, at least not at the current market price.

Historically telecom stocks like AT&T Inc. (NYSE:T) have high yields and relatively slow dividend growth. But when the stock prices get too high, pushing the yields down, the stocks look awfully unattractive. AT&T Inc. (NYSE:T) was yielding as high as 6% in late 2011, but now the yield sits at about 4.8%.

T Dividend Yield data by YCharts

A 4.8% yield looks good, but you need to consider the dividend growth. Over the last decade the dividend has grown at an annualized rate of 4.8%. That’s not bad given the yield, but that growth has slowed dramatically in the past few years. The 5-year annualized dividend growth rate is just 2.4%.

At the current yield AT&T needs to grow its dividend by around 3% annually for the stock to be fairly valued. It’s not that AT&T is overly expensive, it’s that it’s average at best. The dividend likely won’t grow much faster than 3%, and compared to the above two stocks that could see dividend growth well beyond their required rates, AT&T just isn’t all that exciting. It’s consistent, sure, but without a higher yield there are much better dividend growth stocks out there.

There is no telecom in The Ultimate Dividend Growth Portfolio for exactly this reason, and until yields go up that fact is unlikely to change.

The bottom line

The Goldman Sachs Group, Inc. (NYSE:GS) list of dividend stocks is a little hit-or-miss. Of the three stocks I looked at The Western Union Company (NYSE:WU) and Philip Morris International Inc. (NYSE:PM) are great choices but AT&T is mediocre at best. Just because a stock has a high dividend yield doesn’t necessarily make it a good dividend stock.

The article Goldman’s Dividend Picks originally appeared on and is written by Timothy Green.

Timothy Green owns shares of Western Union. The Motley Fool recommends Western Union. The Motley Fool owns shares of Philip Morris International. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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