Stock Comparison: Alphabet's Dividends versus AT&T's Dividends
In the competitive landscape of nationwide mobile internet providers, Americans have just three main options to choose from, with AT&T trailing behind market leader Alphabet in terms of revenue.
Despite AT&T's high dividend yield of around 4%, the telecommunications giant reduced its dividend in 2022 and has since kept it steady, reflecting limited earnings growth and thus limited ability for dividend growth. In contrast, AT&T's rival, Alphabet, offers better long-term investment potential for a 20-year time horizon.
Alphabet's dividend yield may be low (approximately 0.4%), but it has started to increase recently. The tech giant boasts substantial earnings growth potential that could translate into much higher dividends over the next two decades. The company's payout ratio is also low, around 8-9%, indicating sustainable and potentially growing dividends. Furthermore, Alphabet trades at less than 20 times forward earnings, offering room for capital appreciation alongside growing dividends.
On the other hand, AT&T's earnings growth is described as slow, and its valuation appears less attractive from a long-term growth perspective. The company's dividend yield is high, but its earnings growth and dividend increases have been slow, limiting long-term dividend growth potential.
For a portfolio with a 20-year horizon, the combination of growth and dividend potential makes Alphabet a more compelling choice than AT&T, which favors income stability but lacks significant growth prospects. Over two decades, Alphabet's dividend increases and capital appreciation are likely to outpace AT&T’s higher but more static income stream.
While dividend growth at AT&T may not be rapid, the company could soon announce annual payout bumps. AT&T's free cash flow over the past 12 months was more than twice what the company needed to meet its dividend obligation. The company's position in America's mobile internet oligopoly is likely to remain intact for many years to come.
Looking ahead, mobility revenue at AT&T is expected to grow by 3% or better this year. Second-quarter consumer fiber broadband revenue at AT&T soared by 18.9% year over year to $2.1 billion. The yield on cost investors receive from Alphabet shares purchased now, if projected forward, could surpass the amount they receive from AT&T by 2035.
In conclusion, for investors with a 20-year horizon, Alphabet's potential for growth and dividend increases makes it a more attractive choice compared to AT&T, which offers a higher but more static income stream.
Investing in Alphabet for a 20-year horizon could yield higher returns, as its dividend and earnings growth potential are substantial compared to AT&T's slower growth. The low payout ratio of Alphabet indicates sustainable and potentially growing dividends, and its valuation offers room for capital appreciation.
In contrast, while AT&T offers a high dividend yield, its slow earnings growth and limited dividend growth potential make it less appealing for long-term investors. However, the company's free cash flow and expected mobility revenue growth suggest its income stream may remain strong.
Technology plays a crucial role in Alphabet's growth potential, offering it an edge over traditional telecommunications companies like AT&T. This technological advantage could translate into higher returns for investors over a 20-year timeframe.
