Motley Fool: Investors could dial up profits
AT&T (NYSE: T) generates stable revenue and free cash flow by serving millions of wireless phone subscribers and broadband customers. This consistent intake of funds supports regular dividend payments to shareholders.
The company’s dividend recently yielded a generous 5.6% – more than four times the S&P 500’s recent dividend yield of 1.3%.
Whenever you see a stock sporting such a high yield, you should suspect that the company has higher-than-normal risks.
Sure enough, AT&T cut its quarterly dividend in 2022. That was in part to boost the company’s results and also to help pay down debt.
AT&T is making progress on that front: Over the last year, net debt declined from $132 billion to less than $127 billion.
Management is focused on reducing debt while generating free cash flow to support the dividend.
Through the first half of the year, AT&T generated $7.7 billion in free cash flow and paid $4.1 billion in dividends to shareholders, so the dividend appears safe from further cuts.
Wall Street has been concerned about increasing competition in the wireless and broadband markets, but AT&T’s recent performance should mitigate these concerns.
In the second quarter, mobility service revenue grew over 3% year over year, with consumer broadband revenue up 7% over the year-ago quarter.
AT&T may not be the fastest-growing stock, but income-oriented long-term investors might want to give it some consideration.
Ask the Fool
Q: I read that Starbucks is replacing its CEO with the CEO of Chipotle Mexican Grill. Is that good or bad for investors? – C.A., Reno, Nevada
A: Yes, Brian Niccol is moving to helm Starbucks as of Sept. 9.
You can get an idea of what investors think by looking at how the share prices changed upon the announcement. Shares of Starbucks surged more than 24% on the news, while Chipotle shares ended the day down 10%.
Starbucks has been struggling with weak demand in both the United States and China, its two key markets; activist investors have also been critical of the company.
Niccol has been CEO at Chipotle since 2018, and its shares have surged nearly 740% in that period. The switch is clearly promising for Starbucks.
And Chipotle has been left in good health and with improved operations, so the departure of Niccol isn’t necessarily a disaster.
Q: What were the most recent changes to the components of the Dow Jones Industrial Average? – T.H., Kalispell, Montana
A: “The Dow” was launched in 1896 with just 12 companies in it, but in 1928, it expanded to contain 30. Companies are added when they gain importance or removed when they lose relevance or cease operations.
The index also aims to include a mix of industries.
As of 2018, General Electric was the only original component still in the Dow, but it was replaced by Walgreens Boots Alliance that year; this year, Walgreens got the boot, replaced by Amazon.com.
In 2020, Salesforce.com, Amgen and Honeywell International replaced Exxon Mobil, Pfizer and Raytheon Technologies, respectively. Other notable changes include Apple replacing AT&T in 2015 and UnitedHealth Group replacing Kraft Foods in 2012.
My dumbest investment
I began investing 20 years ago. I had always read that it’s best to have a balanced portfolio – “Don’t put all your eggs in one basket.”
If I had ignored that advice and just continued buying one share of Apple and one share of Costco every month for the past 20 years, I’d be somewhat wealthy by now. – D.K., online
The Fool responds: It’s super tempting to look back and feel that way.
But remember that you’re looking back knowing how Apple and Costco have performed over the past 20 years.
Apple shares have grown by an annual average of 35%, while Costco shares have grown by 17%.
The total return for Apple over the past two decades is around 41,920% – and 2,190% for Costco. In comparison, the S&P 500 has grown by around 480% over that period, an average of about 9.2% annually.
But think of the huge hit your portfolio would have taken if you’d invested regularly in just those two companies and one of them ended up struggling.
That’s why it’s wise to spread your dollars across a bigger range of companies. And for those not confident in their stock-picking abilities, a simple, low-fee S&P 500 index fund can be all they need for long-term investing.