Buy AT&T for the Dividend, Dropped Calls

The rule of thumb for long term investments is to expect about an 8% annual return in the stock market. While 8% sounds great, it’s not always easy to do. You have to pick the right company, buy at the right time, sell at the right time, and honestly get a little lucky.

One way to help you reach that 8% annual mark is to pick a stock that pays a good dividend.

There is a lot of growth potential in large cap dividend stocks today because many of them are still trading well below their pre-recession highs. There is also a lot of money to be made with dividends in certain stocks because many companies are posting record profits, and therefore paying a lot of those profits out to shareholders.

There are a lot of great dividend stocks, but one of my favorite is AT&T (NYSE: T).

AT&T Pays a Killer Dividend

As of today, 5/8/11, AT&T is paying a 5.5% dividend yield. That’s the ninth highest dividend yield of all the companies in the S&P 500, which is incredible. That means if you bought AT&T at 31.26 today and held for a year, you would earn 5.5% of 31.26, or $1.72, in dividends. The 5.5% assumes the company will pay the same dividend from the previous quarter (in this case $0.43) in each of the next four quarters.

That’s not always a safe assumption, but I find it to be an incredibly safe bet when you look at the history of AT&T’s dividend. They have paid at least $0.40 in every quarter since 2008. Yes, the same 2008 when we had the Great Recession. Through the entire recession, AT&T never decreased their dividend. In fact, it has risen from $0.40 in the first quarter of 2008 to $0.43 today.

Getting an 8% annual return is a lot easier when you have a 5.5% dividend payment that’s as close to guaranteed as you’re going to get in the stock market.

Take the Bad with the Good

I will be the first to tell you that I’m not a huge AT&T fan. I use T-Mobile for my cell phone carrier, and I am not happy about the merger. AT&T drops a lot of call, particularly on the iPhone. I have also had some bad experiences with their customer service for cable (before I set up my HTPC). With that being said, there are a lot of good things about the company.

• They carry the iPhone and iPad, which is huge for a lot of people and drives a lot of sales
• The U-Verse cable and internet service is actually great. I’ve had U-Verse internet and Time Warner Roadrunner, and U-Verse wins by a mile.
• They are a complete telecommunications company, offering home phones, internet and cable, mobile phones, data packages for tablets, and other data connection options. They are on the forefront of any new mobile technology.
• They will probably merge with T-Mobile soon to increase revenue, market share, and expand their network (potentially helping the dropped calls issue)

Overall, AT&T is a good company with a great history of solid performance. I’m not thrilled with them as a company, but they are at least average or better from a customer service perspective for most of their products. It’s not an exciting company, but they pay a great dividend and they have growth potential in what will certainly be a growing field for the few years.

Other Options

If you don’t like AT&T, try Verizon (NYSE: VZ). They pay a 5.23% dividend yield, and offer basically the same products and service as AT&T. In fact, you could invest in both to diversify a bit. I just love the telecommunications field because it’s only going to grow with every new smart phone, tablet, laptop, netbook, and anything else that needs a data connection.

Disclosure

I currently do not have a position in this stock.

Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.