Motley Fool: A big, fat dividend

With a low price-to-earnings, or P/E, ratio, a hefty dividend and underappreciated growth potential, AT&T’s (NYSE: T) stock is appealing. It’s no secret that the company’s growth in sales and earnings has been sluggish lately, but the stock offers substantial upside at recent prices.

Shares recently sported a 6.5% dividend yield and traded with a price-to-earnings ratio near 11. The telecommunications giant has increased its payout annually for 34 years running (albeit gradually), and even with recent pressures, the business is generating enough free cash flow to cover the dividend and leave the door safely open for more payout hikes.

AT&T’s DirecTV television business is losing subscribers, but it has America’s second-largest mobile wireless subscription base, and the largest pay-TV base.

With its acquisition of Time Warner and its prized assets (HBO, CNN, TNT and TBS), AT&T now has strength in entertainment content, distribution and advertising.

Meanwhile, AT&T is beginning an aggressive rollout of its 5G network into new cities. The fruits of this costly, multiyear spending should be significant, with an expected smartphone upgrade cycle leading to large increases in streaming-data consumption. That’s AT&T’s bread and butter, and it should lead to improved profit margins for its wireless division.

Ask the Fool

Q: Should I invest in municipal bonds? How do they work? — A.L., Decatur, Illinois

A: Parking some money in municipal bonds can make sense for many investors.

Sometimes referred to as “munis,” municipal bonds are essentially loans in which state or local governments borrow money from investors, promising to repay it with interest. The money is typically used to pay for projects such as buildings or repairing schools or roads, or addressing transportation or housing needs.

Just as states and cities vary widely in their financial health, municipal bonds vary in their riskiness. While “general obligation” municipal bonds are backed by the issuer’s credit, “revenue bonds” can be riskier, as they depend on the project being funded to generate the needed revenue.

One advantage of municipal bonds versus vs. corporate bonds is that the interest they pay is usually exempt from federal taxation and often state taxation, as well. (Capital gains on municipal bonds are taxable, though.) Municipal-bond interest might trigger other taxes, such as Alternative Minimum Tax, known as AMT, or Social Security benefit taxation, and it could also increase your Medicare premiums. You might want to consult a financial adviser before investing a lot in municipal bonds.

The minimum investment in municipal bonds is often $5,000. Learn more about them at MunicipalBonds.com and InvestingInBonds.com.

Q: Where can I find the highest interest rates for certificates of deposit, or CDs? – M.Y., Modesto, California

A: Click over to our new site, TheAscent.com. It recently listed interest rates of 3% or higher for five-year CDs and 2.7% or higher for two-year CDs from a handful of financial institutions.

Remember that you’re not restricted to banks and credit unions near you; you can do business with online banks, or ones based far away.

My dumbest investment

I’ve made a bunch of dumb investments – such as buying into Atwood Oceanics. I bought it to add some diversification to my portfolio, as it was in the energy sector.

It did well for a while, but then started getting battered by low oil prices, along with other energy companies. It ended up being bought by Ensco, and I’m still holding those shares, hoping for a big turnaround. – Mark M., Radford, Virginia

The Fool responds: Atwood Oceanics certainly looked promising in the past. It was a smallish offshore driller and was aiming to specialize in ultradeep offshore drilling, which can be more lucrative. It had a backlog of contracted business, too.

But low oil prices, coupled with an oversupply of offshore rigs, presented a tough challenge, along with low-cost shale oil making deep-water drilling less attractive. It was a promising time for stronger players in the industry to consolidate, buying weaker ones, and Ensco scooped up Atwood (later buying Rowan, as well).

The future for Ensco Rowan is not crystal-clear, but bulls expect there to be more deep-water drilling in the future, noting that Ensco Rowan has several billion dollars’ worth of contracted backlog and relatively little debt. It’s in a stronger competitive position, with the industry more consolidated now, and oil prices have been rising lately – though they will likely always be at least somewhat volatile.