Is the Enticing Dividend in AT&T Stock Just a Trap?

You’ve heard the saying that something could be too good to be true. On Wall Street that is an important concept, especially when it comes to dividends. Under normal circumstances, when a stock offers 8% in dividends I get leery. Today we will consider if there is a red flag with AT&T (NYSE:T) stock for that reason.

Sometimes the high yield is the result of pure price action and nothing more sinister.

T stock has fallen 25% from its April highs. However, the slide really started back in 1999.

Back then it had the mother of all double tops that started a slide that has not yet quit. So the fact that the negative price action has lingered this long is concerning. Those who bought it 5 years ago for its yield are upside down on that decision. However, the 2009 era buyers are still okay.

Therefore, when I consider T stock today, I believe there is a valid case to invest in it as a dividend investment. Nevertheless it is not for me. (I’ll have more on that later). Also, knowing when to buy it could make a big difference in the experience. The potential for a trap is there but those who tread carefully could avoid it.

AT&T Is Still a Beast

Fans of AT&T have the right to believe in a company that creates $66 billion in gross profits. Also, the 8% reward is a heck of an incentive in the age of no fixed income. Keep in mind that the high-yield bank rate is 0.6%, and U.S. bonds are only about a point better. But there is much risk in the company that could more than offset that benefit. Consensus is that the company needs to change its ways.

Management is making moves, which is evidence that they recognize it. Meanwhile, the financials are not making tremendous improvements. In fact, AT&T’s net income collapsed after the pandemic. In the 4 years before 2020, it averaged a net income of $22 billion. This is 19 times what it is right now, because it has barely cleared $1 billion.

Management deserves some leeway because what happened last year was a one-off situation. Nevertheless, these are the facts. Investors have to deal with them. Statistically speaking, its price-to-sales ratio of 1x is still very modest. It’s up to management to bring back the business in line with what was happening up to 2019.

The T Stock Chart Shows Basing Potential

The technical aspects of today’s write-up will probably yield the best arguments for owning T stock. Judging from the stock price action, below $25 per share, it could work for a long-term investor. Even though it may have triggered a bearish pattern, the worst case is not likely to develop. Of course this assumes that the stock market in general is not going to correct this year.

If the equities remain bullish as they have been, AT&T stock has the opportunity to bounce off support. This is by no means an all-in situation, because the upside potential will not be easy. Investors who believe in it must also have patience because there are resistance levels into $35 per share. Every level that the bulls tried to hold on the way down will now be resistance on the way up.

Moreover, the $30 per share range has been in contention since 1996. This almost guarantees that the fight to recapturing it will be incredibly hard. Investors who know options should consider using them to help with this bet.

Selling puts below the current price will enable you to go long with a buffer. The downside of that is that you wouldn’t get to participate in the dividends. Therefore, a blend of both makes the best sense.

It Could Work, But for the Right Portfolio

Ultimately, I’d still argue that AT&T stock is a justifiable investment. It just depends on who you are as an investor or trader. It isn’t for me because I’m not that patient. I can find equally as good dividends from companies without legacy baggage.

For example, Exxon (NYSE:XOM) pays almost 6% and management has emphatically defended its dividend. I don’t have that same assurance from AT&T.

There is one more thing to consider, however, when you read through my analysis here. I’ve done business with AT&T from the consumer side in almost all of its segments. I’ve regretted each one of them, so perhaps my negative bias against owning shares comes from that.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.