AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) are two of the highest-yielding telecom stocks you can own right now. Both businesses are doing reasonably well amid the current market conditions and expecting solid single-digit growth. And with interest rates coming down and investors seeking out high returns, these stocks could become more popular in the months ahead.
But which stock is the better option to buy right now? Let’s find out.
Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
AT&T provides investors with a high yield of 5%, and that’s with the stock having done quite well this year, rallying 30% since January. Investors are warming up to the telecom giant, which in the past was seen as a riskier investment due to its expansion into the streaming business.
But in recent years, AT&T has moved away from that and focused more on its core telecom operations instead. The company has recently announced that it is selling its stake in DirecTV for $7.6 billion, in a step that signifies its exit from the costly and highly competitive entertainment business.
Dividend investors appear to be pleased with the company’s recent moves as they add more stability to AT&T’s overall operations, which are growing steadily. In its most recent quarter, which ended on Sept. 30, AT&T reported 226,000 net additions to its fiber business — that’s the 19th straight quarter where that metric was above 200,000. The company now has 28.3 million fiber locations set up, and it expects that number to climb to 30 million by the end of next year.
AT&T also projects that its wireless service revenue will grow by around 3% this year and its free cash flow will total between $17 billion and $18 billion. Given that the company pays $8.2 billion in dividends over the course of a full year, there’s ample room for the business to justify an increase to the payout amid such strong results.
On top of all that, AT&T still trades at a fairly modest forward price-to-earnings (P/E) multiple of 10 (based on analyst estimates). Even despite its strong performance this year, AT&T can make for an excellent long-term buy.
Verizon’s stock hasn’t gotten nearly as much love as AT&T this year, with its shares up a much more modest 9% thus far. But that also helps bolster the case that the telecom stock may be overdue for a big rally. And its lackluster performance is a key reason why Verizon’s yield also remains fairly high at 6.6%.
The company is generating similar growth to AT&T — it’s projecting that its wireless service business will also expand at a rate of around 3% this year. What may bolster its long-run growth prospects is its plan to acquire Frontier Communications for $20 billion, which would expand its fiber network. The deal is not approved and it would result in more debt for Verizon, but in the long run it could accelerate its growth rate. And as interest rates come down, debt may be easier to pay down and may become less of a concern for investors, especially if the business is generating strong results.
And while AT&T might or even should raise its dividend, a growing payout is what Verizon investors have come to expect from the business by now. In September, Verizon increased its dividend for the 18th straight year. It was a modest 1.9% increase but over the past decade, the telecom company has increased its payout by 23%. With Verizon already providing investors with a high yield, there isn’t as much of a need for a big hike anyway as investors are already collecting an extremely generous dividend as it is.
Verizon is also a cheaper buy than AT&T as it trades at a forward P/E of just under 9. Although investors haven’t been rushing out to buy the stock, it could have plenty of upside given its attractive yield and potentially improved growth prospects should the deal with Frontier go through.
Both of these stocks look good today but I’d give the edge to Verizon. Its valuation is more attractive, so is its yield, and the business looks to be focused on expanding its fiber business, which should result in higher growth rates in the years ahead. It may only be a matter of time before investors become more bullish on this top dividend stock.
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,324!*
Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,133!*
Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $420,761!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
