6/9/2014 8:22 PM ET|
AT&T stock is a must-have for retirement
An extended track record of outperformance and sky-high dividends makes the telco a perfect long-term holding.
When investing in dividend stocks for retirement, it's important not to let some shorter term underperformance turn you off to a long-term winner -- like AT&T (T).
This blue chip -- a member of the Dow Jones Industrial Average ($INDU) -- is having a slightly disappointing 2014.
True, the telecom giant on Tuesday raised its revenue outlook for the fiscal year, but it guided earnings per share to the lower end of its range.
Those sort of mixed messages have AT&T stock up on the year, but not by enough. On a price basis, AT&T stock is up just 0.71 percent. Sure, that's still positive, but it lags theStandard & Poor's 500 Index ($INX) price gain of 3.9 percent.
AT&T stock also pays a very generous dividend, but that hasn't helped it beat the broader market so far this year either. On a total return basis (that is, price appreciation plus dividends), AT&T stock is up 3.4 percent. However, the S&P 500 has a total return of 4.9 percent for the year-to-date once you include dividends.
Short-term performance like this can be very deceiving, however, and that's especially true when looking for stocks for retirement, which you're going to hold for very, very long periods of time.
True, past performance is not an indicator of future returns, but if you look back at, say, the past decade, AT&T stock is an absolute winner. AT&T stock has a 10-year total return of 150 percent. The S&P 500's total return comes to just 110 percent over the same span.
Outperformance of 40 percentage points like this can be the difference between a comfortable retirement and . . . well, something else.
Fortunately, even today, AT&T stock still looks like a great long-term holding for your retirement portfolio, based on a number of factors.
Winning on strategy and tactics
First of all, you can’t beat the dividend yield. With a payout of 5.2 percent, no other megacap dividend stock offers anywhere near what AT&T stock does. It's the top-yielding dividend stock in the Dow Jones average by a wide margin, and it's a payout you can count on. AT&T stock has paid uninterrupted dividends for 30 years and counting.
It also happens to be a good time to invest in AT&T stock thanks to a combination of fundamentals and opportunities. AT&T should get regulatory approval for its $50 billion offer to buy satellite-TV company DirecTV (DTV), and that could be a game-changer for the stock.
This move achieves a couple of strategically critical things. A company comprised of AT&T and DirecTV makes it a very formidable competitor to Comcast (CMCSA), which is seeking regulatory approval for its own $42 billion acquisition of Time Warner Cable (TWC).
Not only will AT&T fend off a much larger Comcast with DTV, but its own newfound girth will give it much greater leverage in negotiating fees with content providers.
Equally important, AT&T will get the chance to renew DirecTV's lucrative deal with the NFL, where it's the exclusive provider of games for out-of-market viewers.
Sunday Ticket might be a loss leader for DirecTV, but it will be priceless to AT&T.
Not a single one of AT&T's competitors could claim this kind of close relationship with the NFL, a cash cow if ever there was one. If you’re an out-of-market football fan, case closed. AT&T will be the provider of choice.
Lastly, AT&T stock goes for a reasonable price these days, especially considering the DirecTV catalyst. On a forward price-to-earnings basis, AT&T stock trades in line with its own long-term average. No, that doesn’t make it a steal, but that doesn’t matter so much for a retirement stock.
Valuation reverts to the mean over time. As long as a stock isn't overpriced heading into a situation where you’ll be holding it for many years or ever decades, you''re fine -- an in-line P/E multiple shouldn’t be a concern.
AT&T has an unmatched dividend, a long history of outperformance and is making what look to be very canny moves to compete and succeed in its industry.
You could do a lot worse than holding AT&T stock in your retirement portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
Copyright © 2014 Microsoft. All rights reserved.
Traders might want to bite on BABA, but long-term investors have reasons to wait.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.