Successful dividend investing hinges on finding companies backed by the kinds of sturdy businesses that pave the way for income to be returned to shareholders at regular intervals. Some investors prefer to prioritize stocks that already offer big yields, while others focus more on stocks that offer lower yields now but will likely continue to increase their payouts at a rapid rate.
Good arguments can be made in favor of each practice, and the strategy that's best for you will hinge on your goals and risk tolerance, but building an income-generating portfolio around both high-yield and dividend growth stocks is a strategy that can work out well for prudent and patient investors. With that in mind, here's why AT&T (NYSE: T) and Apple (NASDAQ: AAPL) are stocks that income-focused investors should have on their radar.
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With a tough competitive environment in mobile wireless and cord-cutting clamping down on AT&T's satellite television business, the company's shareholders have mostly had to be content with AT&T's stellar income component in recent years. Sales and earnings performance -- and those waiting for a return to more exciting growth -- have been kept waiting.
The telecom giant's recently published first-quarter results didn't deliver any big relief on the mobile or TV service fronts, as mobile revenues fell roughly 2% compared with the prior-year period and both the company's core DirecTV service and its DirecTV Now streaming offshoot lost hundreds of thousands of net subscribers. These results helped send the shares lower following the release, and AT&T has now lost 20% of its value over the last year -- bringing its dividend yield to a whopping 7%. Another quarter is on the books and AT&T stock still looks like, well, AT&T stock.
The telecom giant has long had the reputation of being a less-than-exciting investment, and at least in the near term, shareholders are probably primed for more of the same. So why is AT&T a stock that should potentially be on your buy list if you're an income-focused investor? The stock's massive yield and forward price-to-earnings multiple of less than 8.5 are obvious reasons, and the company's 34-year streak of delivering annual payout increases evidences commitment to increasing cash returned to shareholders. A push to reduce its sizable debt load will continue to soak up free cash flow going forward and likely keep the dividend growing at a slow pace, but the good news is that the business is still a cash machine, and the distribution is easily covered.
AT&T having a great dividend isn't news, but a 7% yield is pretty eye-catching when attached to a relatively dependable telecom with opportunities in some interesting expansion channels. While pressures on the company's key television and mobile wireless businesses have been front and center for shareholders, a lot of potential impact from the company's growth initiatives has yet to be felt -- giving the stock underappreciated upside. 5G and Internet of Things expansion should open up meaningful new service expansion opportunities, and the integration of Time Warner gives the company broad exposure to entertainment industry growth.
There's considerable appeal in a business that owns both content and distribution channels because of possibilities opened up in areas like bundling and targeted advertising. In addition to its big yield and great payout track record, it's possible that AT&T stock has been boring for so long that investors are missing a more exciting story beneath the surface of uninspiring earnings reports.
Mature hardware companies pivoting to a software-focused model and ramping up dividends to keep shareholders happy during the transition is a path that's becoming well trodden in the tech industry. Stocks like Cisco and IBM fall into this mold, but until recently, most people hadn't really thought of Apple in this way. That's shifted, as weakening demand for the iPhone hardware line has prompted discussion surrounding the company to center on whether its highly hardware-centric business can make the pivot to a services-based model.
The handset line's sales fell 15% year over year in the December quarter, while the company's services segment climbed 19% in the period to reach $10.9 billion -- roughly 13% of sales for the period. Overall, this meant that revenue fell roughly 5% year over year, and in the important holiday quarter, per-share earnings growth was depressed to roughly 7.5%, a significant departure from the impressive sales and earnings growth that shareholders had become accustomed to.
A substantial slowdown in international markets like China meant that iPhone performance came in much worse than anticipated and caught management off guard, but it's probably not a coincidence that the company has been rapidly boosting its dividend and emphasizing its growth opportunities in the services space. The company likely foresaw some degree of down cycle for the handset business, and while iPhone sales may have declined earlier and to a greater extent than predicted, growing its returned-income component was (and remains) a way to alleviate investor concerns during the transition to a more software-focused business.
Apple has nearly doubled its payout since 2012 (when it resumed paying a dividend), its most recent increase came in at a hefty 16%, and the company's stellar balance sheet and growth for its highly profitable software business paves the way for big dividend hikes. Gross margin for the services segment came in at roughly 63% last quarter, so while it's still a relatively small revenue contributor when stacked against the hardware businesses, expansion there should be a substantial, positive catalyst.
With the company having increased flexibility with its massive cash pile following tax reform and low payout ratios on both the earnings and free cash flow fronts, there's a good chance that Apple will continue to deliver big dividend growth. Shares yield 1.7% and trade at roughly 15 times this year's expected earnings, and investors with a buy-to-hold approach can look forward to a fast-growing dividend -- as well as a return to better sales and earnings growth if services continue to gain ground and more substantial product innovations reenergize the hardware business.
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Keith Noonan owns shares of AT&T and IBM. The Motley Fool owns shares of and recommends Apple. The Motley Fool is short shares of IBM and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.