AT&T’s days as a top stock for S&P 500 dividend investors are gone. But luckily, lovers of rising and high dividends have a new king.
Effective on Feb. 1, communications firm AT&T (T) is kicked out of the exclusive and lucrative S&P Dividend Aristocrat index. It’s a collection of the S&P 500 companies that have boosted their dividends for 25 straight years. It’s a selective club: Just 64 companies in the S&P 500 make the cut. Additionally, AT&T is halving its dividend.
AT&T leaves a big hole in the Dividend Aristocrats. With former dividend of 7.9% coming into Tuesday, it was highest yielding member of the index. But it’s also making room for a new dividend king: technology incumbent International Business Machines (IBM). Following the dethroning of AT&T, IBM will take the mantle as the highest yielding Aristocrat at 4.9%.
And the change comes as dividends are all the more important to investors as the S&P 500 goes down. “While the largest gains in dividends are likely behind us … we expect dividends will continue to rise globally,” said Matt Peron, Director of Research at Janus Henderson.
AT&T’s dividend cut reduces the S&P 500’s dividend yield to 1.37% from 1.39%, as $6.92 billion in dividend payments go away, says Howard Silverblatt of S&P Dow Jones Indices.
Saying Goodbye To AT&T
Losing AT&T as a Dividend Aristocrat is a big adjustment for dividend investors.
For generations AT&T has been a perennial “widows and orphans” stock. Its commanding market share plus reliably rising dividend made it a “must own” for many dividend players. But that ended suddenly in 2021.
Following a breakup of its businesses, and rethink of cash plans, the company didn’t boost its dividend for the first time in decades in 2021.
It’s not a total loss. Two new stocks, financial Brown & Brown (BRO) and consumer staple Church & Dwight (CHD), join the Dividend Aristocrats for the first time on Feb. 1. That means the number of Aristocrats will rise to 65. Brown & Brown has boosted its dividends for 28 straight years. Meanwhile, Church & Dwight upped them for 25 years.
But here’s the downside. Neither stock yields much. Brown & Brown yields just 0.6%. And Church & Dwight yields only slightly more: 1%. Both are less than the S&P 500’s 1.4% yield.
IBM: The New AT&T?
The question now is where to find faithfully rising dividends? IBM is the heir apparent.
Following AT&T getting tossed out, Big Blue will be the highest yielding company in the Dividend Aristocrats. And it gets better. Shares of IBM are also up more than 12% in the past 12 months and down just 0.7% this year. That’s better than the 5.5% year-to-date drop of the SPDR S&P 500 ETF Trust (SPY). IBM’s yield also easily tops the S&P 500’s 1.3%.
If IBM is the king, then Exxon Mobil is the next dividend royalty. The company may hail from the energy S&P 500 sector. But it yields 4.6%, just behind IBM. And on top of that, the stock is up nearly 65% in a year, and 2.6% just in 2022 so far.
In fact, half out of the 10 top yielding S&P 500 Dividend Aristocrats have outperformed the S&P 500 over the past 12 months.
Who Cares About S&P 500 Dividends?
It’s easy to ignore dividends when the S&P 500 is rising. But they become a precious asset when the S&P 500 falls.
It was easy to blow off dividends last year. The S&P 500’s 1.8% dividend was a rounding error when the market shot up nearly 27% in 2021. But since 2000, dividends accounted for nearly a quarter of the S&P 500’s average annual return, says S&P Dow Jones Indices. For instance, in 2018 the 1.9% dividend yield of the S&P 500 was a welcome sign when the market sank 6.2%.
So with the S&P 500 down nearly 9% this year so far, it looks like it’s too soon to hang up on dividends.
The New AT&T Dividend Aristocrats
Highest yielding S&P 500 Dividend Aristocrats
|Company||Symbol||Stock 1-year % ch.||Dividend yield||Sector|
|AT&T *||(T)||-16.5%||8.2||Communication Services|
|International Business Machines||(IBM)||12.0%||4.9||Information Technology|
|Realty Income||(O)||14.2%||4.3||Real Estate|
|Walgreens Boots Alliance||(WBA)||3.5%||3.8||Consumer Staples|
|Cardinal Health||(CAH)||-6.5%||3.8||Health Care|
|People’s United Financial||(PBCT)||34.7%||3.8||Financials|
Sources: IBD, S&P Global Market Intelligence, * — removed effective Feb. 1 and dividend cut in half
Follow Matt Krantz on Twitter @mattkrantz
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