AT&T Dividends: Great Place For Starter Retirement Income

It’s on my to-do list over at Seeking Alpha, but I really need to get around to writing a full fleshed article on AT&T sooner rather than later. I haven’t touched on it much in my three years of writing because the company does have a lot of debt ($79.8 billion worth) and while the debt load is not something that would ever cause AT&T to go bankrupt, it is something that puts a drag on AT&T’s ability to grow earnings per share. You can see this yourself by noticing that AT&T’s ten-year earnings per share growth rate is 1.5%.

However, there is a countervailing force at play that is important to take into account: AT&T tends to offer a dividend yield north of 5% that is also simultaneously growing. That combination is very useful for spitting out new shares for someone who is choosing to reinvest their dividends. I was recently running some scenarios in which AT&T dividends get reinvested over a ten, twenty, and thirty year timeframe, and the results are quite extraordinary, especially so if you prize the dividend component of total return (hopefully this will get its own post when I have the time).

But I will provide a quick short-term example: From 2010 through 2014, AT&T raised its quarterly dividend by a penny. The $0.42 dividend in 2010 turned into $0.43 in 2011 which turned into $0.44 in 2012 which grew to $0.45 in 2013 and then became $0.46 this year. Those sloping, gradual penny changes don’t get a lot of attention. And I get it, I understand why Jim Cramer doesn’t spend hours waxing poetic about it to his audience.

But it is useful to be aware of the other side of the story: Each share of AT&T has spit out $7.88 in dividend income since 2010 (and I didn’t factor in the final two $0.46 payments in 2014, because they haven’t happened yet). Someone who bought the stock at $24 per share in 2010 would have already received 32% of his investment amount back in the form of cash dividends alone.

The average reinvestment price during that time was $28.50, meaning someone with 1,000 shares (which would have been a $24,000 initial investment in 2010) would have received $7,880 in dividend income that would have added an astounding 276 shares to the account (note: this understates the case because I took the average reinvestment price from 2010 through 2014 and then reinvested all at once at the end of the period. In real life, you would have acquired more shares every 90 days, and those additional shares would have compounded, so the real-life figure would be above my 276 share back-of-the-envelope method).

The fact that AT&T created at least 276 shares on a $24,000 investment is what most people on Wall Street and in the investment community don’t pick up on. It’s not just that AT&T’s quarterly dividend has gone up by a penny each year since 2010, but the fact that the reinvestment of a high-yielding but growing dividend creates substantial results.

Someone that reinvested would have at least 1,276 shares paying out $2,347 each year. For income investors, getting a 10% yield-on-cost within five years while holding something extraordinarily safe is useful knowledge.

AT&T is very useful if you are interested in receiving growing income that is both safe and stable. If you’re looking for returns that will trounce the S&P 500, AT&T is probably not the right place to look. But, if you are looking for aggregate returns that approximate the S&P 500 while giving you a very strong dividend component, then a company like AT&T is going to scratch you right where you itch.

AT&T could be a very intelligent place for someone who is just getting started with investing in a retirement account and wants to see the legendary magic of dividend growth at work. What’s the maximum amount you can put into a Roth IRA these days? $5,500? That would get you 157 “starter” shares of AT&T. But if you check the “reinvest dividends” box on your brokerage tab, get ready for your share count to be movin’ on up.

You will collect at least $288 within the next year (the next two payments will be $0.46, and then the first quarter of 2015 is when AT&T announces its annual dividend raise). Assuming a reinvestment price around $35 per share, you will pick up 8 brand new shares in the first year. For beginners that want to see dividend results instantaneously, AT&T is quite good when it comes to increasing share count and then subsequent dividend income.

Then you’ll have 165 shares under your belt. Not only do you have eight new shares generating at least $0.46 quarterly dividend payments all on their own, but you will see that growing share count mix with the dividend raise that happens in 2015. For people who like virtuous cycles and actively seeing things grow before their very eyes, AT&T’s dividend occupies a very important place in retirement accounts.

If you keep at it for a decade or two, or mix it with some modest dollar-cost-averaging, the results will be extraordinarily impressive from a yield-on-cost perspective over time. Even if you make one lump sum investment, that’s okay, too. By reinvesting, AT&T is a position that can build upon itself.