If you love huge dividends — AT&T stock probably got your heart racing. But with half of AT&T’s 6.45% yield likely to vanish, it’s time to look at your options in the S&P 500.
AT&T (T) is in rarified air when it comes to dividends. It yields roughly four-times the S&P 500’s 1.4%. But it vies with three S&P 500 stocks with yields that high. That includes communications services company Lumen Technologies (LUMN), energy play Oneok (OKE) and consumer staples firm Altria (MO). All sport old AT&T-like dividend yields of 6.85% or higher, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
If you’re into massive dividends, and AT&T was your go-to, you’re about to get disconnected. AT&T’s surprise move to unload its WarnerMedia assets is likely to slash its big dividend payout, too.
Luckily, AT&T’s cut comes as many S&P 500 companies are maintaining or even boosting dividends. “Dividend payments are expected to increase a conservative 5% for 2021,” said Howard Silverblatt, index strategist at S&P Dow Jones Indices. That “would be sufficient to set a new annual record payment.”
Where Is AT&T’s Dividend Going?
AT&T’s merger of its WarnerMedia unit with Discovery (DISCA) makes a new larger entertainment firm. The new firm is in a stronger position to take on Disney (DIS) and Netflix (NFLX). But it’s the likely end of a storied history of a massive AT&T dividend.
AT&T shareholders get 71% of the newly formed company. But the impact is major on the existing AT&T dividend. Following the deal, AT&T is seen as paying out only around 40% of free cash flow of $20 billion. That would mean a dividend payout of $8 billion. Today, AT&T is paying out roughly twice that much: $14.8 billion, or $2.08 a share.
You might see the AT&T dividend fall in half. That would mean a yield of 3.2%. And the cut could even endanger AT&T’s long-standing position on the Dividend Aristocrats. Those are the companies that boosted dividends for 25-straight years or longer.
Lumen: An S&P 500 Company With AT&T-Like Yields
AT&T wasn’t the top yielding S&P 500 stock even before this deal. That crown goes to Lumen, a Monroe, La.-based seller of communications services. The company, founded in 1968, now yields an impressive 6.93%. Amazingly, too, shares are up 49.2% just this year. Dividend paying S&P 500 stocks are hot this year.
But before you rush out and trade-in your AT&T stock, just know Lumen isn’t a leading stock. Shares of Lumen are actually down 49.2% in the past five years. That’s a stiff price to pay if you consider the S&P 500 more than doubled during that time. Keep in mind, too, the S&P 500 yields 1.4%. Also, Lumen’s profit is seen dropping annually until at least 2025. Analysts think the company will earn just $1.63 a share in 2021, down more than 2% from 2020.
Where Else To Find Giant Yields In The S&P 500
S&P 500 energy stocks are pouring it on this year. Every energy stock in the S&P 500 is up this year so far. And some pay handsome dividends on top.
Take Oneok. It’s a Tulsa-based seller of natural gas. Shares are up more than 43% just this year. But more importantly to AT&T investors: It yields 6.88%. That’s a rich dividend given profits are seen rising along with soaring oil prices. Analysts think the S&P 500 company will earn $3.29 a share this year, up more than 25% from 2020. The stock isn’t a leader, either, but it’s at least up 31% in the past five years. Even AT&T’s stock is down nearly 20% since 2016.
And then there’s tobacco seller Altria. Long known for paying a big dividend, it doesn’t disappoint there. Altria is yielding 6.8%. Again, though, there’s a price to be paid. Shares are down more than 20% in the past five years. If it makes you feel any better, though, Altria’s shares are at least up more than 22% this year.
Know The Danger Of Chasing S&P 500 Yield
AT&T showed big dividends can vanish at the snap of a finger. Additionally, shares prices of all five of the top yielding S&P 500 companies lagged the index in the past five years. Owning these dividend plays, versus the S&P 500, cost you in price appreciation.
So, income investors looking for more diversification might look at high-yield ETFs that own many securities. More than 53 ETFs yield more than AT&T’s 6.45% yield, says Morningstar Direct. But they’re not guaranteed winners, either. The Global X SuperDividend ETF (SDIV) yields an impressive 6.63% from 100 holdings. The ETF, though, lost 30% of its value in the past five years.
Fat dividends are great. Just know you can’t always bank on them.
Top Yielding S&P 500 Stocks
|Company||Symbol||Dividend yield (%)||Sector||% ch. stock 5-year||YTD % stock ch.|
|Lumen Technologies||(LUMN)||6.93%||Communication Services||-47.0%||49.2%|
|Altria Group||(MO)||6.84%||Consumer Staples||-21.4%||22.5%|
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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