AT&T’s stock is doing well this year, but there’s still plenty of room for the rally to continue.
AT&T (T -0.51%) is a good dividend stock thanks to its high yield. At 5.9%, it’s more than four times the S&P 500 average of 1.4%. For income investors, it can make an ideal investment for the long haul.
But there’s even more reason to invest in AT&T: the potential upside. Shares are up more than 30% in the past 12 months, but it is still a sharply discounted stock. Here are three reasons it could still rise in the weeks and months ahead.
1. Interest rates could be coming down
Many analysts expect that the Federal Reserve will start to cut interest rates later this year, potentially as early as September. If that happens, it could trigger some extra bullishness for high-yielding stocks like AT&T. If rates come down, that means investors earn less of a return with bonds and other investments, making dividend stocks more attractive by comparison.
And if the Federal Reserve starts with an initial cut, that could set the expectation that more cuts could follow, especially given how cautious and conservative the Fed has been with cuts and not making them too early.
2. More strong quarters from the company could lead to a dividend hike
As AT&T continues to perform well, it might only be a matter of time before it raises its high-yield dividend. Investors may have been concerned about the dividend in the past, but those worries appear to be easing, with shares of the company growing amid some solid quarterly results.
In its most recent period, which ended in June, revenue totaled $29.8 billion, fairly similar to the $29.9 billion it reported a year ago. Its adjusted operating income of $6.3 billion was also only slightly lower than the $6.4 billion in the prior-year period.
Although its revenue and profit haven’t been soaring, AT&T’s financials have been relatively stable, and that’s what investors need in order to have confidence that the dividend really is safe.
With the company’s modest payout ratio of around 64%, I wouldn’t be surprised if management hikes the dividend later this year if the results remain consistent. That would be a positive sign to investors, signifying confidence in the business, and it could drive the share price even higher.
3. An upgrade cycle for phones could be coming
New phones with artificial intelligence (AI) capabilities are coming out this year, and that could give consumers a reason to finally replace phones they have been hanging on to for a while. New phones and service plans would be a welcome boost to AT&T’s business, which might lead to much stronger growth.
The question is how quickly that will happen; many of Apple‘s new AI features won’t be available until 2025. Some consumers might want to see how game changing those features are, but many others could be tempted to upgrade before that happens anyway.
Alphabet has already launched its own AI phones, but with even more excitement around AI this year, there could be a wave of phone upgrades in the months ahead, which would be great news for AT&T.
Is AT&T stock a no-brainer buy?
Even though shares of AT&T have been rising over the past year, the stock remains cheap, trading at less than nine times its estimated future earnings (based on analyst expectations). For income investors, I think this is a no-brainer buy with a great dividend that looks to be safe, and there’s potentially much more room for the stock itself to go much higher.
The danger in waiting too long is that as the stock continues to climb, the yield will go lower; there’s plenty of incentive to buy now and secure that high payout.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.