This past weekend, I wrote an article backtesting Verizon Communications (NYSE:VZ) as a candidate for a covered call strategy in a retirement portfolio. Continuing with this topic, I would like to include another of my favorites, and Verizon's competitor, AT&T (NYSE:T). I thought this analysis would be of particular interest to investors because the debate as to which is a better investment, Verizon or AT&T, is a very common debate.
From the 20-year period between 1992 and 2012, AT&T's share price has climbed from $18.31 to $37.30, which is over a 3.8% annualized gain in share price, compared with a 3% annual gain for Verizon. This should definitely help you keep up with inflation, which is a major concern about retirement portfolios as retirees live longer and longer. If you retire at 65, it is more likely than ever that you will live into your 90s, and you can be certain that US dollars will not have the same purchasing power 20-30 years later.
The combination of share price gains with adequate yield is the goal of most retirement portfolios, so let's examine AT&T's track record in this area.
This is a plot of AT&T's quarterly dividend over the past 20 years:
The dividend was increased throughout the entire period, every single year. In contrast, Verizon did no dividend increases during a five-year period around the tech crash of the early 2000s. Even during the recent financial crisis, the company has raised dividends by one cent per quarter every year for the past six years. Only a small handful of companies was so well positioned during the financial crisis that they were able to raise dividends. With AT&T's track record of raising dividends through difficult times, retirees can feel confident that they will receive "cost of living adjustments" in their stream of income during any economic situation the world goes through.
Now let's see how AT&T holds up against Verizon in a 10-year backtest of my favorite strategy, selling out of the money covered calls against retirement holdings. I tested this strategy during the (almost) 10-year period from January 2003-July 2012. I assumed that we started with a 1,000-share investment, and that we sold calls that were three months from expiration. To lower the risk of being called out of the stock, we only sold calls that were 10% out of the money. The following chart is a comparison between simply buying and holding, and employing my covered call writing strategy to maximize returns. For the sake of this chart, I am assuming that all dividends are reinvested and used to purchase new shares (everyone should be doing this anyway, but that's a subject for a future article).
Surprisingly, although AT&T has had more volatile price swings over the past 10 years when compared with Verizon, the options premiums collected are actually lower as a percentage of the total investment. In this entire period, the stockholder would only have been called out of the stock seven times as compared to just once for Verizon. The investor would have missed out on $9,992 of potential upside because of getting called out. Over the 10-year period, only $8,100 of options premium would have been collected, giving a net loss of $1,892 when compared to simply buying and holding. With Verizon, using the covered call strategy resulted in $12,443 in extra profit.
I was personally surprised at the result of this analysis. I tend to think of AT&T as an even more stable company than Verizon, and I was curious as to which one was right for my portfolio. AT&T would be the better choice for an investor who is already retired and simply wishes to draw income off of their portfolio. AT&T undoubtedly has the better record when it comes to raising dividends, as well as a better record of annual growth in share price. However, for active investors who are willing to use advanced income strategies such as the covered call selling that I recommend, Verizon is a no-brainer.
Disclosure: I am long VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.