Here's Why I Like AT&T Stock

Dividend stocks offer many potential benefits to investors. They can provide income, boost returns through dividend reinvestment plans, act as a hedge against inflation and economic downturns, and perhaps most importantly, they can outperform the broader markets with relatively little risk and volatility. However, not all dividend stocks are great investments. Dividend-paying companies amid a strategic shift can lag behind the market for long periods.

Telecom giant AT&T (T 0.13%) is a prime example. Despite offering a scorching 6.98% annualized yield, the company’s shares have badly underperformed peers like T-Mobile and the S&P 500 index over the past 10 years.

T data by YCharts.

Now, AT&T’s missteps have been well chronicled elsewhere, and those strategic blunders aren’t the impetus behind this article. Instead, I think it is time to assess whether AT&T stock warrants consideration as either a capital appreciation or an income-generation vehicle. With this goal in mind, let’s dive into AT&T’s core value proposition.

A person talking on a landline.

Image source: Getty Images.

AT&T: What’s the appeal?

What do Wall Street analysts think of the telecom giant? In the last 30 days, 27 analysts have followed the stock, giving AT&T 10 buys and two sell ratings. However, most analysts still rate the stock as a “hold” for now.

Based on the available analyst commentary, the common opinion seems to be that AT&T stock has reached a solid bottom after dropping another 13.6% this year. This conjecture could be correct, given that AT&T’s shares presently trade for less than 7 times expected earnings and near a record low on this measure. So, to sum up, Wall Street’s consensus take seems to be that AT&T offers an attractive combination of value and income, putting it squarely in the “income-generation” bucket of stocks.

Are analysts correct? As a capital appreciation vehicle, AT&T does indeed leave a lot to be desired. Stocks on a multiyear losing streak generally have to shock Wall Street with a solid earnings beat to change their trajectory. AT&T, for its part, doesn’t seem poised to deliver a trajectory-altering financial report any time soon. The company’s earnings, after all, are forecast to rise by less than 3.2% in 2024.

To add to the complexity, the company’s high dividend yield may also limit its growth potential for reasons beyond the scope of this article. Therefore, this underperforming telecom stock doesn’t exactly leap off the page as a must-own capital appreciation vehicle.

Growth isn’t everything

All things considered, I suspect Wall Street’s consensus take will turn out to be fairly accurate once everything is said and done. AT&T shares have probably found a firm bottom, and its enormous dividend should be safe in light of the company’s improving free-cash-flow generation. Hence, I like AT&T stock purely as a passive income play.

That said, I wouldn’t load the boat on this high-yield stock. Because of the intensely competitive nature of the telecom space, the hefty capital requirements of the industry, and the softening global outlook, AT&T probably shouldn’t make up more than a tiny percentage of a well-diversified income-generating portfolio.

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