In my monthly newsletter, The Oxford Income Letter, AT&T (NYSE: T) is listed as a “Buy.” I like its nearly 5% yield, steady cash flow and market domination along with Verizon (NYSE: VZ). I’ve had the stock in the portfolio since February 2014.
Bond Strategist Steve McDonald is also a fan of Ma Bell. As a result, he recommended buying a 10-year AT&T bond with a 4.25% coupon. That means investors will receive a payment of $42.50 every year in interest for every bond they buy.
Why would we recommend both a bond and stock of the same company in the same newsletter?
Because they’re different asset classes.
It’s important to understand that if you had a portfolio with just a handful of investments, I wouldn’t recommend that you own the stock and bond of the same company in that portfolio.
But a well-diversified portfolio would include not only different companies, but different size companies, sectors, risk levels and types of assets.
A stock, even an income stock, is usually bought for its growth prospects, not just its dividend. A bond, while its price can rise, is usually purchased for income and safety.
How Safe Is Safe?
Safety is the key word.
AT&T is a pretty safe stock. The company makes gobs of money. It generated $17 billion in free cash flow last year. Earnings are expected to grow 7% per year through 2021.
It provides a service that everyone in the U.S. and billions more around the world use. The company has been around for decades. Though business cycles ebb and flow, it won’t disappear anytime soon.
It’s one of the safer stocks you’ll find.
Yet the stock price can still fall, even if business is doing well.
In 2008, during the height of the financial crisis, the company’s profits actually increased from $12 billion to $12.9 billion. Yet as the market collapsed, AT&T’s share price dropped 37%. It still paid and raised its dividend, but the price of the stock dropped dramatically.
