Ma Bell Serves Up a Mighty Dividend and Might Be Better Off Without T-Mobile

AT&T (T) offers the biggest dividend in the Dow right now, a roughly 5.9% yield that beats all but a few U.S. large caps. And although outsized payouts from humongous companies often signify trouble ahead, AT&T has just made great strides toward strengthening its future share price. Only not in the way anyone expected.

Ironically, AT&T’s improved prospects are the result of its botched attempt to add sorely needed coverage to its wireless network. A $39 billion takeover of T-Mobile USA announced in March would have resolved that issue splendidly, but regulatory and political opposition squashed any hope of pulling it off cleanly. By the time AT&T agreed to drop the whole thing on Dec. 19, investors didn’t mind so much that the penalty involved forking over $4 billion in consolation money to T-Mobile parent Deutsche Telekom.

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Plan B is shaping up as a more popular option. Days after giving up on T-Mobile, AT&T announced regulatory approval to buy $1.9 billion in spectrum from Qualcomm (QCOM). It’s messier to cobble together enough of these to make a T-Mobile, but few doubt AT&T’s ability to do so. Thanks largely to its success with Apple (AAPL) and Amazon (AMZN) products in recent years, AT&T has plenty of cash to fund expansion. And AT&T’s market cap further strengthens its chances of buying companies or assets.

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There’s also plenty of opportunity to purchase small chunks of wireless spectrum on the cheap now. Shareholders in Clearwire (CLWR), MetroPCS (PCS) and Leap Wireless (LEAP), all of which have seen their investments drop 38% to 61% in the past year, might truly welcome an AT&T takeover.

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AT&T’s biggest drag – and the real reason its dividend yield stays so much higher than those of T-bills – remains the landline side of the business. Non-wireless services still account for some 25% of AT&T revenues, and the future for home phone lines isn’t bright. Residential internet services have saved this side of the company from massive revenue losses. Industry analysts barely acknowledge the impact of this business these days.

A lot of investors were skeptical of AT&T’s bid for T-Mobile from the get-go, and the nine months spent trying to wrestle it in shape now looks like wasted time. Verizon (VZ), AT&T’s biggest competitor and one with an awfully similar profile, has made its shareholders a lot happier this year.

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But with the iffy mega-merger now out of the picture, AT&T’s way forward looks a lot clearer and more manageable. A string of bite-sized acquisitions -- the kind of strategy that tends to move share prices steadily up -- are well-within AT&T’s area of expertise. And with AT&T’s dividend yield of nearly 5.9%, the share price doesn’t have to move much to make the investment worthwhile.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.