Is AT&T Still a High Yield Dividend Stock?

High-yielding dividend stocks often rise in response to interest rate cuts. This relationship stems from investors seeking higher returns as fixed income yields fall.

With the Federal Reserve expected to enter a long rate-cutting cycle, dividend-paying stocks with yields above the 3% mark are in the spotlight. For example, AT&T (NYSE: T)a longtime favorite among income investors, has seen its shares rise about 30% year-to-date, outperforming the benchmark S&P 500.

This significant price movement has changed AT&T’s investment profile since the beginning of the year. While the stock’s yield fell modestly, its valuation rose sharply. Let’s examine whether AT&T stock is still a top high-yield stock after its strong 2024 rally.

Telecom titan with a tempting yield

AT&T’s dividend yield of 5.1% rises above its peer group average of 3.92%. The telecom’s dividend-paying peer group consists of Verizon Communications, T-Mobileand Comcast.

On the other hand, AT&T’s payout ratio is 63.7%, considerably higher than the peer average of 55.1%. This high payout ratio suggests that AT&T devotes a significant portion of its earnings to dividends.

However, it is important to note that the telco’s payout ratio is well below the 75% threshold. Historically, crossing this threshold has been a red flag for dividend increases and often precedes payout cuts. In other words, AT&T’s hefty yield looks sustainable, even in a slowing economy.

A leveraged balance sheet raises eyebrows

AT&T’s debt ratio of 1.24 indicates a leveraged balance sheet. This means that the company has more debt than equity and is financing its operations.

A high debt load can limit financial flexibility and increase interest expense, potentially impacting future dividend growth. The telecom giant’s substantial debt stems from years of heavy investment in spectrum acquisitions and network infrastructure.

While these investments are vital to AT&T’s competitive advantage in the evolving telecommunications landscape, they pose significant financial challenges. The company must balance the attractive dividend yield with reinvesting in the business and reducing the balance sheet.

AT&T’s strong free cash flow and strong market position suggest it can manage this balancing act. However, shareholders should pay attention to the company’s debt management strategy, as it is critical to both dividend sustainability and long-term competitive positioning.

The story continues

Valuation and growth prospects

AT&T stock is currently trading at 8.62 times 2026 earnings. To put that into context, the S&P 500 is trading at about 17 times 2026 earnings, according to bullish forecasts.

AT&T appears to be undervalued compared to the broader market. Value investors may find this characteristic attractive, especially when combined with the stock’s fairly high dividend yield.

However, AT&T’s basement valuation is not without reason. Wall Street expects the telecom giant to post revenue growth of just 1.6% in 2025. Moreover, this sluggish pace is expected to persist, with revenue growth forecasts remaining in the low single digits for the next several years.

Two key factors contribute to AT&T’s poor growth outlook: intense competition among Tier 1 telcos (AT&T, Verizon, and T Mobile) and the emergence of new technologies that open the way for more low-cost competitors to enter the market.

Simply put, AT&T stock may not be as great as its forward price-to-earnings (P/E) ratio seems to imply.

Is AT&T stock still a buy?

Despite its leveraged balance sheet and tepid growth outlook, AT&T remains an intriguing option for income-focused investors. The company’s return is above the peer group average and above typical S&P 500 stocks.

Moreover, while high, AT&T’s payout ratio remains comfortably below the 75% danger zone that often precedes dividend cuts. As interest rates trend lower, AT&T’s attractive yield should continue to attract investors, potentially pushing its stock even higher.

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George Budwell holds positions in AT&T. The Motley Fool recommends Comcast, T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Is AT&T Still a High Yield Dividend Stock? was originally published by The Motley Fool