The Federal Reserve's recent 50-basis-point cut to interest rates marks the beginning of what could be steadily declining rates over the coming months. It will become harder to find a good payout from places like high-yield savings accounts, and this may push retirees and other income-focused investors to high-yield dividend stocks to generate the passive income they need.
U.S. telecom giant AT&T (NYSE: T) is well-known on Wall Street although not for very positive reasons in recent years. The longtime dividend stock has struggled with debt and even cut its payout a couple of years ago. Retirees need dependable dividends to pay their bills. So, can AT&T be the right stock for retired investors now?
Assessing a more focused AT&T
Most know AT&T for its core business as a wireless carrier in the United States. It's part of an oligopoly that controls the market. AT&T has approximately 71.9 million postpaid phone subscribers.
It struggled over the past decade, but not due to its core business. Management tried to expand AT&T beyond telecommunications into the media world. The company acquired DirectTV and Time Warner in two massive acquisitions that loaded the company with long-term debt.
Ultimately, AT&T couldn't overcome its debt load and pulled the plug on its media experiment. It spun off DirecTV and Time Warner in deals that helped raise cash to pay its debt. It cut the dividend to free up cash flow. AT&T destroyed a lot of shareholder value throughout this process, and the company still has lingering debt.
However, AT&T has come a long way and maintains an investment grade credit rating. Investors can now focus on the wireless business again, which continues to grow. AT&T has increased its postpaid phone base from 63.1 million in early 2020 to 71.9 million today. It has been a slow grower for years, but sustained wireless growth should push earnings higher over time.
Can you trust the dividend?
Of course, retired investors will likely be far more interested in the dividend than in share price gains. AT&T's dividend yield has been lower since the cut in 2022, but it's still robust at 5.1% today. That's a significant number because that's roughly what many high-yield savings accounts paid until the recent rate cut. Investors will likely see those savings yields fall, making AT&T's dividend more appealing.
The million-dollar question is whether you can trust it. A dividend cut isn't typically something to celebrate, but it has completely changed the financial math of AT&T's payout. This year, management is guiding for $17 billion to $18 billion in free cash flow. The pre-cut dividend cost AT&T almost $4 billion quarterly, a nearly $16 billion annual expenditure. In other words, AT&T sent almost all its cash profits out the door.
The current dividend is roughly half that amount. It costs $2 billion quarterly, an $8 billion annual expense. That leaves as much as $10 billion left over that management can use to continue paying AT&T's debt. Plus, it leaves breathing room in case cash flow drops unexpectedly. It's a smaller dividend than before, but it's rock-solid, and investors can now sleep well at night feeling good about AT&T's ability to pay shareholders.
AT&T's dividend is perfect for retirees and income investors, but the stock offers more than that. Analysts believe the company will grow earnings by almost 3% annually over the next three to five years, so management can increase the dividend without dramatically changing the math behind it.
Plus, AT&T is far less volatile than the broader market. The stock has a beta of just 0.59, which means it's less responsive to volatility. That will limit AT&T's upside when the market is doing well, but it should also mean it drops less during market downturns. Peace of mind is an underrated part of a retired investor's strategy.
AT&T's steady nature and dependable dividend are the perfect addition to a diversified retirement portfolio.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is AT&T the Right Stock for Retired Investors Now That the Fed Has Cut Rates? was originally published by The Motley Fool