AT&T(T)’s latest dividend has left some investors feeling trapped. Some market items and blankets add to the dismal feeling. You would think that investors are doomed to a big drop in income that would devastate their retirement. Worse still, the feeling of “no way out”. Nothing could be further from the truth.
If you have maintained the new dividend cut and also have Warner Bros. Discovery (WBD), there are several options here. Even if you have sold Warner Brothers stock, there are still several options.
Let’s start with the problem
Sometimes we are all too busy having fun or working, and then there are the grandchildren. The wallet just doesn’t get the attention it should. Then we wake up one day and find something like this:
We thought we were getting $52 for every hundred shares when the notice comes that we are now getting $27.75. It hurts.
Now, I’m a fan of the idea that AT&T will fix this problem over time. But if you need income (now) to live on and don’t like buying and selling because you have more important things to do, then it’s probably time to set aside some time for some due diligence to see what you can do to fix this rather painful result.
To the rescue
There are plenty of stocks currently paying more for the impatient. But many readers want “Sleep Well At Night” (SWAN) stock. Enterprise Product Partners (NYSE:EPD) is one such possible solution.
Enterprise Products Partners is an oil and gas industry mid-market company. Many consider midstream companies to be the utilities of the oil and gas industries. Enterprise Products Partners itself is investment grade and has been for some time.
As noted above, the immediate result of the sale would be a quarterly distribution of $46.50 per 100 shares. This fixes much of the dividend decline that happened with the AT&T dividend, even though your money is no longer buying 100 shares of Enterprise Products Partners at the current price.
I was calculating that you could (very roughly) buy about 85 shares for every 100 AT&T shares sold with the Warner Brothers shares you received in the recent spin-off. This calculation will vary according to the various fluctuations in the price of the shares at the time it is printed. This would mean that your quarterly income would immediately jump to $39 percent stock for investing in one of the highest-rated midstream companies in the industry.
Admittedly, this does not take you back to where you started before the dividend cut. But you leave behind all the risks of a turnaround while granting you an immediate salary increase. Moreover, this company is in perfect health and has been increasing its well-covered distribution for two decades. As a holder, you can expect more well-covered payout increases in the future. This makes this company a “dividend aristocrat” even though it is a distribution (not a dividend).
What’s even better about it is that the K-1 form they send you will allow you to have a good portion of the income (based on past experience which does not guarantee the future) free. of tax. For some of you in the higher tax brackets, this can significantly increase the value of income.
At this point, you have more income that usually has a non-taxable component (although the K-1 part may be difficult for some who do their own taxes). The stability of the historical-based distribution is greatly improved by AT&T and Warner Brothers. In the meantime, the risk of “betting” on a reversal is ruled out.
The most important consideration is that management has invested in the units alongside you. Thus, they “eat their own cuisine”. This management has long had a very conservative reputation while growing the company steadily over the decades.
Mid-industry stocks (or common units) often follow upstream. So there is some price volatility. But the operating history of this stock makes it the very desirable SWAN stock discussed earlier. The increase in distributions is the icing on the cake. The best part is that the midstream industry crowd is seeing a comeback, much like the upstream oil and gas industry is currently. So there is still some upside potential in the stock, even though the price has risen well from the fiscal 2020 low.
Intermediate activity works with long-term contracts. Therefore, in any given year, there are not many expirations that need to be renegotiated. This is why this part of the business is known as the utility of the oil and gas business. Enterprise Products Partners has many paid businesses geared toward the growing natural gas industry. Much of what this company does can be (and to some extent already is) used in the rapidly growing hydrogen sector. Therefore, “green future” is not a threat to this company (no matter how it turns out).
The ethane component of natural gas is used to make plastic, which is very important for the green revolution, and natural gas itself is the preferred source for the rapidly growing hydrogen market. The reason for the preference for natural gas is that on a chemistry chart it is very easy to see that the carbon-hydrogen bond is weaker than the oxygen-hydrogen bond. Thus, using natural gas to make hydrogen is less expensive today.
Even if an investor waited until the “last minute” or “too late” to consider selling AT&T and Warner Brothers, there are ways to improve the situation. The one suggested above probably decreases the investment risk compared to the current situation. Indeed, AT&T has announced its intention to regain investment grade status. With Enterprise Products Partners, you have one of the strongest midstream companies in this industry (and it’s already investment grade).
The oil and gas sector has been out of favor for some time. But it is also to the benefit of the investor because the common unit price of Enterprise Products Partners will continue to rise as the industry returns to favor the market.
There are many possible income opportunities depending on the risk the investor wishes to take as well as the investor’s ability to monitor investments. But it’s up to the income investor themselves to gauge exactly what they can handle.
The key is that you are not “locked in” to the current situation as Mr. Market would suggest. There are many good solutions that will improve your income if that’s what you want to do right now. By all means, thoroughly investigate any new idea. But if you need to improve your income, now is the time to go.