IBM Or AT&T: Which High-Yielding Stock Is A Better Income-Generating Play?

With inflation running close to a 40-year high, investors are increasingly looking for solid dividend-paying stocks that will provide them with a low-risk income stream.

But achieving that goal isn’t so simple in the current challenging economic environment.

The average dividend yield on the S&P 500 index is hovering around 1.37%—close to its lowest in 150 years, excluding the peak of the dot-com bubble two decades ago.

And if you are looking to invest in high-yielding stocks, the risk is that companies might cut their payouts if the economic situation worsens and cash flows dwindle.

Today, we analyze International Business Machines and AT&T to understand which high-yielding blue-chip stock is the better choice for income-focused investors.

IBM: A Defensive Play

International Business Machines (NYSE:IBM) has certainly disappointed investors during the past decade regarding growth. Unlike other high-growth technology stocks, this 110-year-old company struggled to remain relevant when customers shifted their data storage to cloud-based solutions. It closed Tuesday at $138.37.

IBM proved dead money for investors during CEO Virginia Rometty’s eight-year helm started in 2012. A period in which Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL) rallied as demand soared for computing power and applications.

But since her departure in 2020, there are positive signs that Big Blue, as it’s sometimes referred to colloquially, is reclaiming lost ground. IBM’s new corporate structure has brightened prospects for the company’s long-term growth after many years of declining sales.

Last month, in its latest earnings report, the New York-based company posted sales that topped analysts’ estimates. The results showed strong demand for hybrid-cloud offerings, signaling continued momentum for its transition to a business fueled by cloud-based software and consulting.

This turnaround momentum, coupled with its solid balance sheet, makes IBM a safe, high-yielding dividend stock, which has raised its dividend for 27 years.

The stock currently pays $1.65 a share of quarterly dividend, which translates into a 4.89% annual dividend yield, making it one of the highest-yielding stocks among the blue-chip companies.

Analysts at Morgan Stanley and Bank of America believe that IBM is an excellent defensive play in the current complex macro environment, especially when its turnaround is gaining pace and producing better earnings.

Over half of IBM’s revenue is now recurring rather than based on one-time transactions, giving it an edge over other hardware companies, such as Dell Technologies (NYSE:DELL) and HP (NYSE:HPQ).

AT&T: A Pure Telecom Play

America’s largest telecom operator, AT&T (NYSE:T), is another dividend stock that has recently gained attractiveness after disbanding its media business to become a pure telecom giant. AT&T closed Tuesday at $20.57.

The Dallas-based company made a well-timed exit from the media and streaming business last month when its WarnerMedia merged with Discovery, creating Warner Bros Discovery (NASDAQ:WBD).

The move came at an opportune time, as the video streaming market is growing increasingly competitive and investors are dumping top media stocks like Netflix (NASDAQ:NFLX).

In a recent note to clients, J.P. Morgan Analyst Philip Cusick said that the simplified AT&T presents upside for investors, assigning an 'overweight' rating to the stock. His note added:

“AT&T now looks more like Verizon than it has in years after shedding the distractions and revenue drag of a declining satellite video business and the capital obligations of the Warner/HBO media businesses.”

With an annual yield of 5.47%, investors can earn one of the best returns available from a blue-chip stock with a long track record of paying dividends. The company pays $0.277 a share quarterly payout. Plus, the company did not disappoint investors in its latest earnings report.

However, despite encouraging signs emerging from AT&T’s turnaround, the telecom operator remains one of the most indebted entities in the US, with $169 billion in net debt by the end of the first quarter.

That heavy debt load will limit the company’s ability to grow its payouts, lowering its investment appeal.

Bottom Line

IBM, in our view, is a better dividend stock than AT&T, especially after the new management’s clear shift to cloud computing, which is a high-growth area. These steps are encouraging and could unlock the value of IBM stock, which has hiked its dividend for 27 years straight.

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