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By Josh Peters, CFA | 03-20-2015 10:00 AM

When Dividend Yield Isn't Enough

AT&T may have a dividend yield of more than 5%, but Verizon's dividend-growth rate and smart capital-allocation decisions point to better total-return prospects, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Josh Peters--he's the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. He recently sold AT&T (T) and purchased Verizon (VZ) in his model portfolio. We're going to talk about why he made that swap.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: So, you recently made this change between AT&T and Verizon, which at a high level are very, very similar businesses. What prompted you to go ahead and make this move?

Peters: It started, really, with my dissatisfaction with AT&T, which has been swelling and compounding over the years. It's tough to own a stock for four years, as I did with AT&T, and feel like you've never been happy with a single decision that the company made. I remember, not long after I first bought the stock, they went after T-Mobile (TMUS) and that ended with a gigantic breakup fee that they paid plus some spectrum to T-Mobile. And where is T-Mobile now? It's their biggest, keenest competitor, trying to take market share away and, frankly, causing them some problems in the industry.

I don't know that AT&T can be blamed entirely for that, but it certainly didn't help to help finance one of your smaller competitors that way. And you also saw the company, which already had a very large dividend, was returning plenty of cash to shareholders; they decided to make $27 billion worth of share buybacks at an average price for the stock that I think is a little bit higher now, even for all those repurchases, than it trades at today. So, that's destroyed shareholder value.

And then more recently, they have bought assets in Mexico. Why are you getting into Mexico? Don't you have a pretty big wireless business here in the United States? Can you pay more attention and devote more to that? They paid too much, we thought, in a huge spectrum purchase that was $18 billion. And then DirecTV (DTV): I can understand that maybe they want a little bit more bargaining leverage over broadcasters and cable stations and stuff like that, but this is an unrelated business with a lot of long-term technological risk.

So, the message that finally sank in over a series of years was that AT&T wants to do, it seems, everything except focus on its core business and just be content with paying a large and rising dividend out of that. The dividend rose all four years that I've owned it, but the growth rate of only 2% just didn't make for a great total return even with a dividend yield over 5%.

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