Reasons AT&T Is the Best Income Stock for 2017

AT&T Stock: History of Rewards 

AT&T Inc. (NYSE:T) has been trading as a public company for more than 30 years. Investors in T stock have been rewarded annually in many different ways, such as through capital share price appreciation and a steady and reliable dividend. Needless to say, the company has proven itself quite shareholder-friendly.

Below is more info, including the history of AT&T stock’s dividend and details about if the dividend and/or overall business can grow.

AT&T Dividend History

AT&T stock has been paying a quarterly dividend to shareholders since 1984, the year it went public, and has never missed or cut the payment in any way. Below is a sample of AT&T’s stock dividends over its history, including its dividend per share (DPS).

Aside from being quarterly, this chart shows that the dividend is also reviewed and increased every December. 2017 marks the 32nd straight year that the dividend has been raised.

Investors are not the only ones that have noticed these consistent trends; the administrators of the S&P 500 Dividend Aristocrat Index have as well, adding AT&T stock to the index, which only consists of around 50 companies. In order to be part of the index, a company must be a member of the Fortune 500 (one of the 500 largest U.S. businesses based on market cap) and have increased its dividend at least 25 straight years. It is worth noting that of these 500 companies, AT&T is one of the 10 largest.

AT&T Dividend Payout Ratio

The payout ratio is the most important financial metric for any dividend-paying stock. A dividend is paid out via earnings, and the payout ratio is what tells you if the company is earning more than what it’s paying out. The payout ratio is calculated by dividing the annual dividend by the annual earnings and the calculation should be used for the past few years to ensure consistency.

A company earning more than what is paid out is worth consideration as an investment opportunity; after all, it’s earning more than it spends. It also implies a higher probability of the dividend being safe and seeing future growth.

In contrast, a company which pays more than it earns has a chance of seeing the dividend cut. This could be due to the company using cash reserves to satisfy investors, which means the risk of running out, or maybe it is issuing more equity or using debt to fund the dividend.

So how does AT&T’s dividend payment hold up based on its payout ratio history? Below is a chart of the annual earnings, annual dividend, and payout ratio over the past four years.

AT&T’s annual earnings are on an upward trend, which means that the company is growing in terms of revenue and earnings.

The annual dividend payment per share is also on an upward trend. As mentioned earlier, the dividend has increased on an annual basis because earnings saw continued growth.

As for the payout ratio, it is on a downward trend, which is great news for investors. This means the company has been able to pay out a consistently higher dividend and keep more money within the business. While it might not seem like a lot–2016’s payout ratio is only $0.05 lower than 2014’s–keep in mind that AT&T earns billions of dollar a year, so it really adds up over time.

With growing earnings and dividends, more money is left after the dividend is paid. The stock price should increase in step, adding to investors’ bottom lines.

One other area that should be looked at is the forecasted payout ratio, determined using the annual forecasted earnings and dividend. For 2017, annual forecasted earnings are expected to rise 2.9%, with an expected annual dividend of $1.96 per share. As a result, the forecasted payout ratio is 67%.

Can the Dividend Continue Growing? 

The trend over the last few years has been a dividend increase of $0.01 per share. The dividend can continue this growth whether earnings remain flat or continue to increase. Earnings growth means more cash is available for a higher payout, while flat earnings are acceptable because the dividend is not being paid out using the entire amount of earnings, providing a safety net via reinvesting back in the business. However, this is nothing to worry about since, in AT&T’s case, earnings are expected to grow.

And with earnings growth comes potential dividend growth. For example, if there was a $0.01 increase in 2018, it would represent a total annual payment of $2.00. Earnings would cover this amount without any issues.

Where Is the Growth Coming from for AT&T? 

AT&T is a utilities business that is part of the oligopoly in the telecommunications sector. A lot of the company’s spending came at its very beginning, when it had to build its infrastructure out. While there are still other costs of running the business, such as general operations and maintenance fees, there is little beyond this. And when the costs move higher, the end users of AT&T’s services are the ones left picking up the tab. As a result, AT&T maintains its margins while growing revenue.

Growth has also been possible through acquisitions. In 2014, AT&T completed the purchase of Leap Wireless to increase its market share in the telecommunications sector. The increase added about four-million new customers to its ecosystem, increasing AT&T’s customer coverage base to approximately 280 million. (Source: “AT&T Completes Acquisition of Leap Wireless,” AT&T Inc., March 13, 2014.)

More recently, AT&T has moved to acquire Time Warner Inc. (NYSE:TWX). Expected to close towards the end of 2017, this deal includes assets such as TNT, TBS, CNN, Cartoon Network, HBO, and Warner Bros. Entertainment. This would add worldwide revenue generation and give AT&T access to new markets. (Source: “AT&T to Acquire Time Warner,” AT&T Inc., October 22, 2016.)

AT&T Dividend Yield

The dividend yield is the return received based on a specific purchase price. In order to calculate this price, the annual dividend is taken and divided by the purchase price or trading price. For instance, if a stock is paying out an annual dividend of $1.00 and is trading at $10.00, then the dividend yield on the stock is 10%.

Stock prices changing every second that the markets are open means that dividend yields are going to change as well. That said, AT&T’s dividend yield remains in a very steady range thanks to the low volatility of its the price movements.

Over the past five years, T stock’s dividend yield has been in the 4.5% to 5.8% range, with shares trading between $31.00 and $44.00. Dividend hikes prior to that had similar stories, since income investors always want a growing dividend and will bid up the share price.

One advantage of owning a stock such as AT&T’s, with its growing dividend, is that the return on capital occurs at a faster pace. What this means is that if shares were purchased and not sold until all the capital that was invested was returned via the dividend, you would not have to hold them as long since more capital would be earned back every year.

Another advantage is that owning the shares longer means that the average yield on the purchase price would increase. For example, shares of AT&T were trading at $32.00 in 2014, while the annual dividend at the time was $1.84. The yield then would have been 5.75%, but if you held on to them to the present, it would be 6.125%.

Final Thoughts About AT&T Stock 

T stock is one of my favorite stocks and potentially one of best income opportunities for 2017. Holding on to the shares for a longer time means generating a higher return through the dividend, while hikes in said dividend support a higher stock price, since it will catch the interest of more investors.

The stock price should see an increase because of the recent acquisitions and earnings growth. Higher earnings are likely to be reported in the future, which means shares trades higher and an increased dividend. Lastly, AT&T’s volatility is less than the overall market and there should be the preservation of capital in the stock.