Telecommunications giant AT&T (NYSE: T) is a household name and a well-known dividend stock. Had you invested $100 in AT&T in 1995, your investment would have grown to $476 today. Is that good? Well, it definitely needs context. Many investors buy AT&T for its huge dividend, which yields an impressive 6.5% at its current share price.
But a lot more goes into investment results than just a dividend. So let’s take a closer look at AT&T and use its past to help determine whether it’s worth holding for the future.
The difference a dividend makes (or doesn’t)
Are you a glass-half-full or glass-half-empty type of character? AT&T has multiplied an initial $100 investment to nearly $500 over the years. However, that incorporates total returns, share price gains and losses, and dividends paid. Take the dividends away, and you would have lost money!
The dividend optimist might argue that dividends were the difference between losing and multiplying their money. That’s true, but even the total returns have dramatically trailed those of the S&P 500 index, which would have turned the same $100 into more than $1,200.
The bottom line? Yes, dividends can significantly boost your total returns over the long term, especially when you reinvest them to turbocharge your compounding snowball. But there is far more to a stock than its dividend. The dividend alone doesn’t make an investment great.
Where AT&T falls short
It’s time to change your gaze and focus on AT&T’s broader business performance. A great company generates value for its shareholders over time. That’s the most basic definition of a great investment.
So how has AT&T done since 1995? A company’s return on invested capital (ROIC) measures the return it generates when it invests in the business. A high return means it can put resources in and get a lot out. AT&T’s business is currently generating a negative ROIC, meaning it’s destroying value when it invests.
