Initially I was not planning on purchasing stock this month. But a single investment stuck out to me and made me think if paying off debt faster than the minimum payments is the best move financially. That stock is AT&T (T).
I purchased 29 Shares of T for $34.91 a share after fees, $1012.51 total, after fees. This purchase will increase my annual dividend yield by $53.36.
If you looked at my most recent net worth update you will see that currently I have just over $117,000 in various forms of debt. However, on that page I did not include interest rates, one of the reasons is because the student loans are at 3 different interest rates. The one student loan I plan on paying off next month carries a 5.35% interest rate, and is the higher rate loan I have.
After that my rates are 5% for the mortgage, my weighted average student loan payment will be at 3.52% interest (original amounts at $5,500 at 4.25% and $11,000 at 3.15%). So why is that important in making a decision on buying this particular stock?
The current yield is greater than my interest rates
The dividend yield on this stock purchase is a whooping 5.27%! After my one student loan is gone, the dividend yield from AT&T will be greater than any of my outstanding loans. Being this is all accumulating tax free in a ROTH account, I will not be taxed on the gains either. This makes for an easy comparison if the investment is worth more than my loans.
I expect AT&T will raise dividends
The dividend growth is not great, but there is growth. In the last 3 years it has grown 2.3% and 2.4% going back 5 years. Even without growth they are yielding a better return than I am paying on interest. Growing that return also means that I will have an even better return on the investment than paying off debt.
The share price does not need to grow at all for 9 years
If the price of the stock doesn’t grow at all in 9 years before the remainder of student loans are paid off it will be a better investment than paying off debt. I have no concerns of AT&T holding it’s value for this amount of time. 30 years compared to the mortgage may be a different story, but I do not see this company losing it’s dominance in a short period of time. They have a large wireless network, provide DSL internet, and are also hooked up with providing TV through satellite. On that note I am a customer of AT&T for both my phone and internet, so effectively I am now getting a return on my own purchases by being a shareholder in their stock.
The Payout Ratio isn’t overbearing
At 54.12%, the payout ratio is generally higher than I desire for my expected lifespan. That said, it isn’t MUCH higher than I desire at an entry point and they do have some room to continue to grow dividends even in the recent leaner years for revenue and income growth. Actually, over the last three years Net Income has shrunk by 2.8%, which is better than the industry average according to morningstar.
Dividend Updates
On my July Stock purchase I had came to $240.50 in annual dividends based on the current payouts. In addition to the recent purchase, two stocks that I own have made recent dividend announcements that changed the current payout.
Kellogg (K) has announced it’s recent dividend at $0.49 per share, a $0.03 increase. Being that I own 21 shares this will boost my annual income by $2.52, very cool!
Now… Sturm Ruger (RGR). They announced $100 Million in stock buy backs and a dividend of $0.45 per share. This is a $0.04 DECREASE per share based on their most recent dividend of $0.49. I am not happy they are favoring the buybacks over maintaining the present dividend rate. I am currently not looking to sell, but I am displeased with the decrease of $4.00 in annual dividend income.
With the new purchase of AT&T, the changes in the dividends for the aforementioned stocks, I am now at $292.38 in annual dividend income. Not a bad start! Once the other ROTH clears the rollover I will be looking to purchase about 4-5 more stocks. So I may end up having more purchases this month, it all depends on the timing of things.
Full Disclosure: Long T and K, possibly long on RGR
Photo Credit: suphakit73 / FreeDigitalPhotos.net
Ha, I bought some AT&T today too!
Even though the growth rate of the dividend hasn’t been great recently, the current yield is too good to pass. Especially when setting up your portfolio and making quick progress in the beginning.
Congrats on your purchase, Kipp!
NMW
Hey NMW,
I agree that the growth hasn’t been spectacular. But I feel it is a solid investment and can fare much better than putting that capital against debt. Even minor growth will result in a much larger payout for the capital invested 9 or so years down the road. That said, I wouldn’t put much more than two more investments of this size in the short term (if the yield stays consistent that is). Just because I don’t want more than 10% of my total stocks being allocated to one investment. Granted I am off the market for stocks until the ROTH IRA rollover is complete, it seemed simple to set it up, but it is moving slow!
Still waiting on them clearing your site, I guess they really did intend to not do anything until after 24 hours!
More than 10% in one single stock for your entire portfolio is too much indeed, except for the set-up fase of course.
I hope you can enjoy my website soon. Let me know if you like it or not!
Hey NMW,
Yea 10% is alot, and is about my limit in the start-up phase. But assets are growing fast, over $600 each month just automatically going into tax deferred accounts as well as paying down those debts and trying to stuff little extra bits into a ROTH or Loyal3… it is all adding up. Going to make money work for me sooner rather than later if I can help it!
I have been clicking on your links as I see you commenting on other blogs and still nothing. It is past the “48 hours” by now as well, so I will probably have to e-mail their customer service again.
Love the T purchase. I am also a shareholder. Gotta love the big dividend and the increases while not great are still increases. While not an owner of RGR, the dividend cut would cause me to sell their shares if I owned any. Though with this cut, this pretty much assures me that I won’t be an investor any time in the foreseeable future.
Thanks for stopping by Chad. If RGR was selling near where I purchased it I would probably have just sold it off, but unfortunately they are about 13% below where I bought it so I feel that I should ride it out and see where it goes from here. I am not looking to realize that capital loss and I think there will be better days for RGR even if I do want to sell, now isn’t probably the best time. There will be another huge political event or tragedy that will cause gun sales to rally, it is an unfortunate truth, but after that it would be a better time to exit.
Based on current dividend yield alone sounds like a great purchase. Playing devil’s advocate a little, why not choose KO or JNJ companies who continually pay and raise their dividends year after year and most consider to be less risk adverse companies?
And long term with your debts do you plan to take the money from the Roth to pay them off or make the assumption that your investment will grow faster than paying off student loan? I think I asked that correctly;)
Hey Even Steven,
Great questions. AT&T is also a company that continuously raising it’s dividend, has been for 30 years, so they are right up there as a quality dividend stock. With that said, KO and JNJ are definitely stocks I will desire adding to my portfolio. Coke I will probably add via Loyal3 and Johnson and Johnson will probably be in a ROTH account. I don’t see how AT&T is really a risky position to be in, it is a fairly stable stock much like KO and JNJ. On a side note, neither have current yields close to where AT&T is at currently, so they aren’t as comparable to my debt – in the short term. Also, the payout ratios for KO and JNJ are very close or higher, so for them to exceed AT&T in dividend growth it MUST be from profits. Which they are more profitable, so they will probably be able to do this – but they have alot of yield to catch-up to. Eventually they will probably surpass AT&T for yield on cost, but in the meanwhile I can use the capital AT&T generates.
For debts I don’t really plan on using capital to pay it off. I plan on clearing them out before age 40, but I am flexible and open to options for best allocating my money. The ROTH contributions are part of my early retirement fund (but in reality I can just pull out the dividends, not the actual stock purchase).
Anyways, I do feel that the investment will grow faster than the student loan, but the investment itself doesn’t need to grow for me to win. Even the dividend doesn’t need to grow. That is why I felt it was a great purchase. More than likely AT&T stock will increase marginally while the dividend will continue to provide some grow which will cause the dividend income to greatly outpace my loans (and it starts higher to begin with).
Buybacks are all the rage these days. Too bad RGR is placing more emphasis on the buyback than a dividend increase.
Best wishes with your investments
R2R
Thanks Roadmap2Retire. Yea, I wish they would have at least kept the payout the same and lowered buybacks. Oh well, we shall see where they go in the future, I am not planning on selling right now, maybe later if they are going to continue in this direction.
Nice work! I’m new to the blog, nice seeing you here (I also write at Dear Debt). I need to get with the program and start investing. I’ve been so focused on paying off debt, but need to look into stocks, etc.
Hey Melanie,
Thanks for stopping by! It is a tough balance between paying off debt and investing, obviously the debt needs to go away at some point to work for financial independence, but I have a decent time frame for it. I have paid so far ahead on the mortgage currently that I have 22.75 years left right now, not even a year into it. Granted that is a bit longer time frame than I would like for financial independence, so I just need to find some money here and there to keep it to 12 to 15 years. Little amounts in the beginning make the biggest difference since they have the most time to compound (either way, paying off debt or investing)!
Nice buy. You mentioned T before, glad to see you bought some. Good luck with the investment, cheers!
Hey Henry,
Yes, I did mention that I bought some T over on your blog when you were talking about Markel. No dividend yield on MKL which is a bit of a bummer, but that is how they and Berkshire operate I suppose. I may decide to pick up some Berkshire B shares at loyal 3, not sure. Out of their select offers I have been looking at MSFT to put my credit card rewards into. It a system that works well with no fees and it is an easy way to allocate my credit card rewards in the future! Free money making money, doesn’t get much better than that.
Good buy Kipp. I don’t have any T in my individual portfolios, but I wouldn’t be opposed to them. I think for 9 years, you’re safe with their moat… that being said, I’m with you as I don’t know how they will fare over the next 30. Between Google Fiber being a real threat to their internet business (eventually), consumers dropping cable, the decline of landlines, and an increasingly savvy mobile phone shopper, I don’t know how confident I would be in them, VZ, or any telecomm player over a 30 year horizon. But then again, I know very little. Plus, the starting yield is pretty great and you went about it in an intelligent way, so all the better.
Hey Ryan,
Thanks! Yea I agree that compared to the time-line for finishing off the student loans, it is a no brainer. Compared to paying down a mortgage? Maybe, maybe not. AT&T is a large company and may be able to adapt to changing circumstances. But, they may not be a major player if things change drastically, but I can’t see them disappearing completely in 30 years. They may just not be as relevant as they are now. I don’t see cell-phones going away, and only a few companies have the networks in place. Sprint, VZ, AT&T, and I suppose T-Mobile. Add to that, only really AT&T and VZ are decent for coverage around here. So I think they have a much better moat than the other two as they have the network more established. I don’t see another company coming in and building a vast wireless network to compete any-time soon, basically those four are the current gate-keepers in the industry for access.
Love T. High dividend with a great history of them. Good buy man. Good job growing the dividend fund. Keep on grinding!
Hey Asset-Grinder! I do believe it is a good buy, may not have extraordinary growth, but still a solid stock with many years ahead of them in my view.
FYI your net worth is almost incomprehensible to me! That is alot of dough!
That’s a nice buy there, good job on that one. Knowing when to pay off debt versus when to invest is an interesting dilemma, the only debt I have is a pretty low rate mortgage so for me investing usually seems like a better idea, though there was a time when my mortgage was higher and the market seemed a lot worse where paying off debt seemed like a better idea.
Hey Zee,
Thanks for coming by. It can be a difficult balance sometimes to know what the best answer is, paying down debt or investing, the good thing is both will put you in a better position financially. However, inaction would not.
Good for you on the increase of annual dividend income. Why didn’t RGR just do a smaller buy back and not hurt the status they have with dividend growth? Oh well looks like it might make sense to find another alternative to RGR, that values the shareholder.
Hey EL,
I asked that question myself. Why decrease the dividend when doing so much in buybacks? I don’t plan on selling currently, but I am also not looking to add to the position currently.
Yea AT&T gave a huge boost in annual dividend income, wouldn’t mind adding a little bit more, but need cash or the ROTH rollover to finish!