Dividend stocks can offer a valuable source of income for investors who want to diversify their portfolios. However, investors should also be aware that most of these stocks will gradually decline in value over time unless the dividend is reinvested.
This may seem surprising, but ample evidence supports this claim. Only a few dividend stocks have been able to provide cash payments to shareholders consistently while also increasing their share prices over time.
Two of the most popular dividend stocks in the market today are AT&T (NYSE: T) and AbbVie (NYSE: ABBV), but they have different appeals. AT&T is attractive for its high yield, currently 6.72%. AbbVie also has a decent yield of 4.02% and has established itself as a leading dividend growth stock and reliable passive income source for shareholders. To illustrate these points, the company has increased its dividend by 287.5% since it spun off from Abbott Laboratories in 2013, and it is a Dividend King due to its heritage.
Which of these top dividend stocks is the better income play? Let’s dig deeper to find out.
The case for AT&T
Over the next few years, AT&T is expected to steadily reduce its debt thanks to its improved free cash flows and lower costs. The company should also face less competitive pressure from its rivals because the U.S. wireless market has become more stable after T-Mobile‘s merger with Sprint and the completion of the 5G network rollout.
Lastly, AT&T’s stock screens as markedly undervalued, with its shares trading at less than 7 times expected earnings. In fact, the telecom giant’s stock is currently trading near a historical low on this classic valuation metric.
The case for AbbVie
AbbVie is a biopharmaceutical company that rewards its shareholders with a generous and growing dividend. The company has a proven track record of delivering strong revenue growth and expanding its market share in autoimmune diseases, where its best-selling drug, Humira, is a market share leader in multiple indications. AbbVie has also diversified its portfolio into other lucrative areas, such as oncology, with breakthrough drugs like Imbruvica for various blood cancers.
The company has a solid pipeline of innovative drugs, and its recent acquisitions could add more value to its business. AbbVie’s dividend yield is slightly higher than the average for its industry, and its stock is trading at a low valuation compared to its peers at less than 14 times forward earnings. However, Humira’s sales are declining due to biosimilar competition, and novel branded competitors could further challenge its dominance in immunology over the next five to 10 years.
AbbVie scans as the better buy in this comparison. The drugmaker is facing some important challenges, but it also operates in a fast-growing and dynamic healthcare sector that benefits from favorable demographic trends, scientific breakthroughs, and robust global demand.
AT&T, on the other hand, is struggling to grow its sales in a mature and highly competitive U.S. telecom market. So, even though it offers a higher dividend yield, AT&T stock may not be as appealing as AbbVie’s at the moment.
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Better Income Stock: AT&T or AbbVie? was originally published by The Motley Fool