Two Mega-Cap Stocks With 5% Dividend Yields: How to Choose

We are fast becoming dividend nation. Morgan Stanley Smith Barney recently pointed out that assets in ETFs with a dividend-based investing theme has jumped from barely $5 billion in 2008 to more than $40 billion today.

Nothing wrong with that in principle. But newbies chasing the highest yielders could be missing out on finer points of dividend investing.

With a fat 5.3% dividend yield, AT&T (T) looks like dividend ambrosia.

But it’s not exactly easy to make those payouts.

T Payout Ratio TTM Chart

T Payout Ratio TTM data by YCharts

Yep, its current dividend payout ratio is 231% of its net income. High payout ratios aren’t uncommon in telecoms -- Verizon’s (VZ) is currently 171% -- but the current level is a 10-year high. Cash-flow has been strong enough to keep the per-share dividend/cash ratio right around 70%. Still, like all telecoms AT&T is stuck in a never ending cap-ex cycle, which has averaged around $20 billion annually since 2007, and management recently announced plans to increase that to $22 billion in 2013.

Granted, getting paid 5.3% is pretty good compensation. But dividend hikes have barely kept pace with inflation.

T Dividend Chart

T Dividend data by YCharts

Compare that to Royal Dutch Shell (RDS.B), with a dividend yield of 5%, has a dividend payout ratio below 40% and has a dividend growth rate over the past five years that is about double AT&T’s.

Perhaps most important, is the price you pay today. Royal Dutch Shell has a PE ratio below 10 while AT&T’s PE ratio for the past 12 months is north of 40.

Carla Fried, a contributing editor at, has covered investing for more than 25 years. Her work appears in The New York Times, and Money Magazine.



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