The combination of highly volatile markets and extremely low interest rates has caused a significant amount of interest in dividend stocks. Traditional investments such as certificates of deposits, money market accounts, and short-term bonds no longer offer a meaningful yield for income investors, plus stocks that offer a dividend are often relatively stable when compared to stocks that offer little or no dividend.
AT&T Inc. (T) has been one of the dividend stocks of choice for at least a couple of years and the demand for this stock has surged even further in 2012. This company is based in the U.S., far from the troubles of the European debt crisis, and it has a stable revenue base. Plus, it offers a dividend yield that is above average and much higher than what many other income investments currently offer. However, as investor demand keeps pushing the stock price higher, the yield keeps going lower, and eventually this stock becomes increasingly at risk for a potential decline. At current levels near 52-week highs, investors should think twice before piling into this overly crowded trade.
Aside from the fact that this stock is now overbought and offering historically low yields, investors should consider that U.S.-based dividend stocks in general could drop in the coming months because tax rates on dividends are poised to rise significantly under Obama's 2013 budget. Taxes are now just 15%, but could jump to as high as 44.8%. Investor appetite for dividend income will be sharply curtailed, if a huge jump in the tax rate greatly diminishes net returns. Also, the rate for capital gains taxes is also set to go higher next year, so investors who have large gains in stocks (and many of them do) could be planning to sell their dividend stocks later this year and before 2013.
Investors who want to buy a leading telecom stock near a 52-week low that yields more than twice as much as AT&T, should consider France Telecom (FTE). This stock is experiencing downside and more volatility due to the European debt crisis, but the shares appear dirt-cheap at just over $12. While this pick won't make sense for all investors, contrarians should love it. France Telecom is a leading provider of mobile, fixed-line and Internet services in France, but it also provides services in Egypt and Africa, which could become sources of future growth. If you want to buy cheap, now is the time, especially when this stock trades for about 6.5 times earnings, while AT&T trades for around 15. Since this stock offers a whopping yield of over 12%, it won't hurt so much if dividend tax rates go up. Plus, a lot of bad news is already priced into this stock, so the downside could be limited from here.
Key Data Points For France Telecom From Yahoo Finance:
- Current Price: $12.63
- 52-Week Range: $11.68 to $22.52
- Dividend: about $1.66 annually which yields 12.8%
- 2012 Earnings Estimate: $1.87 per share
- 2013 Earnings Estimate: $1.87 per share
- P/E Ratio: about 6.5 times earnings
AT&T is one of the leading telecommunication companies offering fixed-line, mobile phone, Internet and other services. AT&T carries the popular iPhone and iPad tablet. This stock was trading around $29 per share at the start of the year and has had a huge run, especially for a company of this size, to about $36. At currently elevated levels, the chance of capital gains is more limited and the risk of a pullback is heightened. The yield is now below 5%, which also makes the stock less attractive.
Key Data Points For AT&T From Yahoo Finance:
- Current Share Price: $35.66
- 52-Week Range: $27.29 to $36
- Dividend: $1.76 per share which yields 4.9%
- 2012 Earnings Estimate: $2.38 per share
- 2013 Earnings Estimate: $2.56 per share
- P/E Ratio: about 15 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.