Dividend growth investors like high yielding stocks because they offer more income. When it comes to these types of investments, investors want to be sure that the dividend is safe. Stocks with yields above 5% can be a red flag to as there maybe heightened risks of dividend cuts in the future. Generally, these companies have elevated payout ratios, making future increases unlikely unless earnings improve significantly or the company has to take on debt to pay for the dividend. Neither of these cases is ideal and investors should avoid these stocks.If earnings were to experience a significant decline, the dividend could very well be at risk.
There are some companies, however, that pay a healthy dividend yield that is well protected, allowing investors to have their cake and eat it too. Some companies offer both a high yield and a low payout ratio that reassures their shareholders that the dividend is not only safe, it can increase in size over time. Let’s examine AT&T’s (T) business, recent quarterly report and dividend history to see if the telecom giant is an appropriate high yield investment.
Company Background and Recent Earnings Results
AT&T provides communications and digital entertainment products, such as wireless and TV to customers.AT&T employs almost 250,000 and has a current market cap of more than $234 billion.
AT&T released 2nd quarter earnings results on July 24th. The company earned $0.91 per share, $0.06 above estimates and a 15% improvement year over year. Revenue declined 2.1% from the previous year to $39 billion, missing estimates by $300 million.
The company had 3.8 million net wireless additions, 3.1 million of which were in the U.S.AT&T added 46,000 postpaid wireless phone customers (phone plans with a contract) and 356,000 prepaid phone subscribers (plans without a contract) during the quarter. Postpaid phone churn, a measure of how many customers switch services, was just 0.82%. DirecTV had net ads of 342,000.
