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 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. 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 and consumer staple Church & Dwight, 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. 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 * | -16.5% | 8.2 | Communication Services | |
| International Business Machines | 12.0% | 4.9 | Information Technology | |
| Exxon Mobil | 65.1% | 4.6 | Energy | |
| Chevron | 45.3% | 4.3 | Energy | |
| Realty Income | 14.2% | 4.3 | Real Estate | |
| AbbVie | 24.3% | 4.1 | Health Care | |
| Walgreens Boots Alliance | 3.5% | 3.8 | Consumer Staples | |
| Cardinal Health | -6.5% | 3.8 | Health Care | |
| People's United Financial | 34.7% | 3.8 | Financials | |
| Consolidated Edison | 23.1% | 3.7 | Utilities |
Sources: IBD, S&P Global Market Intelligence, * — removed effective Feb. 1 and dividend cut in half
Follow Matt Krantz on Twitter @mattkrantz
