AT&T: Buy The Stock Or The Bond?

Which is more deserving of your hard earned bucks: AT&T (T) the stock or AT&T the bond?

AT&T stock pays a 5.9% dividend. By comparison, that dividend crushes the yields offered by AT&T bonds. Of the more than 40 callable AT&T bonds, none pay anywhere close to that yield, even those going out over 30 years.

Bond yields are graphed below (blue). I've also plotted the spread between the stock and bond yields (red) on the same graph to emphasize the attractiveness of the stock dividend. The stock dividend has a greater than 3% yield over AT&T bonds maturing in less than nine years. Throughout all time periods, the equity beats the bond in yield.

While bond yields are fixed, stock dividends are not. AT&T has a great track record of increasing its dividend, having raised it 27 consecutive years. It's so ingrained in their culture that they number it for you in each press release announcing the increase.

By the way, AT&T is due for a dividend bump. Every December AT&T raises its dividend. It's a good guess AT&T boosts its dividend for the 28th time. After all, why wreck a perfectly good record? Should the stock remain at the same price, these annual increases will shift the red line up, making the dividend even more appetizing.

The rush to bond "safety" has driven yields lower, making high dividend-paying stocks appear even more mouth-watering. AT&T is but another example of this phenomenon. If you trust the mother of all Bells to repay loans, why not go a step further and buy the stock?

My prediction: These types of discrepancies aren't going to last for long. Bond prices will either drop, raising yields, or stock prices will climb making their dividend rates less compelling. This is an opportunity to buy AT&T and comparable dividend-paying stocks at attractive prices.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.