Apple Vs. AT&T: For Dividend Investors, AT&T Comes Out On Top
Summary
- Apple is a good company with a low starting yield but a high dividend growth rate.
- AT&T is also a good company but with a high starting yield and a low dividend growth rate.
- For some investors Apple is the better investment but for other investors AT&T is the best investment.
The Set Up
Apple (AAPL) and AT&T (T) both pay dividends. However, AAPL has been the right pick for one type of investor and T is the right pick for another type of investor. I'll be a bit extreme in what I say so I can make my points. However, I understand that many investors walk a middle path. I'll cover this in the end.
Here's how the article plays out. First, I will quickly talk about AAPL and T. It won't take long because there's no need to dive into piles and piles of data. Second, I'll provide charts that show why AAPL is far superior to T. Further, I'll explain why AAPL has been the right choice for some investors. Third, I'll provide some charts that show why T is superior to AAPL. It's a bit shocking, but for some investors, the evidence is clear. T is undoubtedly the most rational investment by a large margin. Lastly, I'll provide a middle path that will likely make everyone happy.
AAPL Is Best For Growth Investors
While it's true that AAPL pays a growing dividend, you're not going to get rich from that cash stream unless you own a large pile of shares. So, we must instead look at something different.
AAPL's dividend and dividend growth are far less important than AAPL's capital appreciation. If you want to "make money" with AAPL, the idea is that you buy and hold because the price of the stock goes up. The best reason for the stock to go up is because it's growing. It's generating more and more cash over the years and shareholders are partners, participating in the growth. Rewards are handed out by way of dividends but also by waiting for someone else to buy your shares at a higher price in the future.
Investors can also "make money" with AAPL because the market has been placing an increasingly high value on earnings generated. Price expands faster than the value, or to use some jargon, the price-to-earnings ratio expands. Here's one way to look at this:
Source: FAST Graphs
It's not difficult to see that earnings have slightly increased while the price has exploded upwards. So, yes, there's growth in earnings but the stock price has been moving up much faster than those earnings. In this low-interest-rate environment, the market is placing more value on those earnings now than they have in the past.
Here's another quick way to understand AAPL's P/E expansion:
Data by YCharts
It's not hard to see that AAPL's P/E was between 10 and 20 for many years, but then it exploded upwards. And, that "explosion" happened before COVID-19, so that's not the cause. In any case, the company is profitable. Earnings are expanding. AAPL's price is going up and up. Therefore, it looks like a wonderful investment.
At this point, we have plenty of data to show that AAPL has been a good investment. The charts I've shown are probably not shocking at all. This next chart isn't shocking either, but it drives home the point that while AAPL is a dividend growth stock, it's the price that deserves the attention. This is best understood by comparing AAPL with another dividend growth stock. We'll compare AAPL with T to make this very clear.
Data by YCharts
This is AAPL's magic on full display. First, I'm showing price change, not the actual price. This is a fair comparison with an unfair outcome. AAPL destroys T. Second, this is over 10 years. AAPL did fine for seven to eight years versus T but it's really been a killer in the last two to three years. AAPL has enjoyed incredible capital appreciation recently. Third, T's price is actually lower now than it was 10 years ago. It's down nearly 1% over the past decade. That's wild considering we've pretty much been in a bull market.
So, the chart directly above comparing AAPL's price with T's price makes it clear that if you're interested in growth, AAPL is far superior. It's like AAPL brought a tank to the fight and T bought a squirt gun. It's not even close.
Now, at this point, many investors would dismiss T. It seems that all hope is lost. But, now we must consider a different type of investor, and their goals.
T Is Best For Income Investors
I'm specifically talking about investors who are seeking immediate income. However, I'm also focused here on investors who desire higher income, as well, for very long periods of time.
Using the example earlier in the article, it's easy to talk about selling AAPL shares to generate income. But, many investors are old-school. They have no interest in selling. They want to buy and hold, and they want to get paid to sit and collect. Why destroy the seed corn? It gets complicated because if you keep selling down shares, you're destroying your chances to enjoy capital appreciation but also your dividends are decreased by every share you sell.
I've also heard arguments about how growth overcomes this selling of shares. However, what's largely ignored is that very often earnings aren't really increasing quickly enough. Instead, the price might be rising rapidly, perhaps even to nosebleed levels. But, earnings aren't growing at the same speed. We've just recently seen that AAPL's price is moving much faster than earnings. Therefore, it gets uncomfortable to hold just as much as it gets uncomfortable to sell. Timing becomes more and more important, instead of the fundamentals.
Put another way, investors need to pick and choose buying and selling points. In some ways, it can very much feel like an investor is simply selling to a greater fool. That would be someone who has decided that AAPL's earnings are better than one year ago, three years ago, or pick some other time frame. I'm not saying that's wrong. I'm saying that some investors are uncomfortable with timing their buying and selling. If you're seeking steady income, then this guessing game might not be a rational approach.
I fully understand that more sophisticated investors have the time, tools and disposition to generate steady income from a stock like AAPL. For example, there are some sell-off strategies that can work. And, some investors can effectively employ options strategies. But again, this isn't appropriate or least it's not always comfortable because of the effort required, plus the risks.
Therefore, dividend growth investors might wish to exploit a different strategy. That is, investing in T can be quite rational for income investors. Now, we'll look at the proof for this claim.
Right now, AAPL yields about 0.7% and the dividend growth rate since 2015 is about 10%. Let's assume that continues going forward. And, right now, T yields about 7.5% and the dividend growth rate since 2015 is about 2%.
So, AAPL has the advantage of growth whereas T has the advantage of a high starting yield. I think it's obvious that at least for a few years, T will win the current income game. But, it's intuitive to think that AAPL's high dividend growth rate will overcome T in little time. But, that intuition is wrong. Here's how this "dividend race" plays out.
Source: Miller Howard Yield on Investment Calculator
AAPL is the blue line and T is the golden line. It's rather obvious that at this rate AAPL will never generate as much dividend income as T will generate.
Even more interesting, if we "burn" T's dividend cash (i.e., take the money and spend it all) but we allow an investor to reinvest all AAPL's dividends back into AAPL stock, then T still wins easily after 25 years.
Source: Miller Howard Yield on Investment Calculator
The results are clear. It will take 30+ years for AAPL's dividend to equal T's dividend despite the fact that the dividend growth rate is five times greater.
High dividend growth rates cannot easily beat high starting yields, especially if those high yields include small to moderate increases. Furthermore, using this example, we can see that even when we are "cheating" by extracting T's cash, while pouring AAPL's dividend back into more shares via dividend reinvestment, AAPL still cannot win.
The conclusion is that T is better for current income. What's more, T is better for dividend investors seeking dividend income many years into the future.
Dividend growth is powerful but if your starting yield is low, you cannot expect to generate more income than a high yielding stock for many decades. In fact, you might never see your stock generate as much income.
Wrapping Up
There are good reasons growth investors love AAPL. The capital gains have been tremendous over the years. The company might continue to generate substantial wealth going forward. It's good to note that earnings growth and dividend growth are great for investors who are willing to buy and hold. And, extracting value is easy via selling shares if you're willing to part ways, and your timing is satisfactory. This is rational.
There are also good reasons income investors love T. The high starting yield has been terrific over the years, and is especially great right now. Although there are always risks, e.g., debt load, T should continue to pump out loads of dividend cash going forward, even with slow or zero dividend growth. Getting your hands on cash is quite easy. You sit and wait for the cash to arrive in your account. No selling required. This is also rational.
Perhaps you've already figured out the middle path. If these were the only two stocks available, you'd simply figure out how much cash you'd like right now, versus how long you are willing to wait. Furthermore, you could weigh the risks of holding one company versus the other. For example, it's easy to look at AAPL's valuation and then T's. You can look at payout ratios, debt levels, credit ratings, cash on hand, and more. In short, you could buy AAPL or T, or both, or you could just hold your cash and wait until you get the price you'd like. The middle path is the one where you maybe buy a lot of AAPL and very little T. Another middle path is the one where you maybe buy a little AAPL and load up on T.
I do not believe it makes sense to engage in a holy war against any other type of investor. In this article, you've seen that AAPL is perfectly rational and reasonable. And, you know there are risks because as the stock price has increased far faster than the earnings, therefore the opportunity becomes less appealing. But maybe the rate of earnings growth increases. Maybe not. The point is that AAPL isn't risk-free. Likewise, you've also seen that T is fantastic as a current income vehicle. Over time, the income it produces far exceeds what AAPL offers without sale of a single share. No selling is required, and that's true peace of mind. Yet, T's debt load is heavy. T's leadership has also made questionable decisions for many years. There's no free lunch with T because there's risk here too.
You see, it all comes down to knowing what you need now, and in the future. Then, you line up your options and you weigh them. The label you give yourself (e.g., growth investor, dividend investor, buying and hold investor) matters because it shapes how you think about your investments.
Know thyself. The best investments shall be revealed before your eyes.
Please be sure to post your comments below.
This article was written by
Analyst’s Disclosure: I am/we are long AAPL, T. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (137)
They really want people to drop it and I will give them just what they want.
Goodbye forever. I will take as many customers away as possible.
More likely, AAPL will continue to steadily go up while T continues its steady decline
Agree.
Long long term holder of lots of T and Apple.
Love Apple and became wealthy as a result.
Don't talk to T much and living separate lives.
Too tired to file for divorce.
1. That in 1997 the company was so broke that Bill Gates literally GAVE them $150M to keep them alive and avoid antitrust...only to become a $2T company selling phones
2. That a $50 music ipod with licensing issues would become a phone
3. That people would pay over $1000 for a phone and view it as a life and death instrument which literally IS the entire life of millions of owners.
Not me!
With all that, as a retiree, I'll take my 7% yield.
How can the breakup not have had negative effects? Without it, do you think we'd be getting unlimited cell service for rates lower than ever? Do you think the spectrum auctions would be generating significant costs? Do you think they'd be desperate enough to buy DTV to attempt to grow? It's water under the bridge but T would control telecom without the breakup. Imagine if AAPL had no choice but to have 90+% of their phones on T network. Heck, T might own AAPL!