AT&T — My Saving Account
On the most recent episode of The Investor’s Podcast Mastermind Discussion, one of the big topics of discussion were cash alternatives.
Traditionally, diversifying across investment strategies (growth, value, speculation, emerging markets, hedges, etc…) was accompanied by keeping some cash on hand in case a good investment opportunity arises. While you’re sitting on cash, you could earn some interest from your savings account or invest in short-term CDs to at least try and account for inflation.
However, today, interest rates are at 0% and are not likely to increase anytime soon. This means that you’re losing money to inflation by keeping cash on hand.
There is no such thing as free lunch, and definitely no such thing as a risk-free investment, but the downsides of holding cash could be offset by accounting for the risk and volatility of a certain investment vehicle.
@stig_brodersen mentioned that he uses Vanguard’s value and momentum ETFs as a place to park cash while he is “shopping around”. My alternative to this is AT&T ($T). At today’s price of approximately $29, you would get a 7% dividend yield, so even if the stock trades horizontally for the foreseeable future, you would still be earning 7% (taxed) every single year. Their valuation is neither cheap nor expensive, but from a technicals perspective, it is a stock that trades horizontally and has had a reliable dividend for decades now. The company’s fundamentals aren’t amazing, but the revenue stream is reliable. Though the stock is unlikely to break out anytime soon, it provides a fundamental service (e.g. broadband) that is unlikely to go away in the near future.
Market Crash: If you park all of your cash in AT&T and the market crashes as it did in March of 2020, you will definitely take a loss on your principal, but I believe it’ll be much smaller than that of the broader index. For example, if the market crashes by 30% tomorrow, I anticipate the $T won’t fall by more than 10% because of its current valuation and the types of investors (i.e. likely not day traders) that hold the stock. If this happens, you can take a loss on $T, and invest in a better opportunity.
No Crash: If the market doesn’t crash (continued QE, interest rates never increased, speculative frenzy continues, etc…), at least you’re earning a 7% dividend yield in the meantime.
Inflation: If inflation picks up, goods and services are going to appreciate in price as well. Since AT&T provides a fundamental service with a reliable revenue stream, they are likely to increase their prices by the same margin, which will help the topline, and in turn, the stock price. It will hopefully account for inflation while you’re also earning a 7% yield.
It’s hard to determine a fair value, but according to https://stockrow.com/T, it’s trading at historically low multiples, and has a steadily growing revenue and FCF, while slowly reducing its debt. Combined with the fact that there have been some insider buys in the past year, it seems like the company’s management is trying to be responsible.
Lastly, as described in this SureDividend post, there are potential catalysts such as 5G rollout or new content on HBO Max that’ll attract more customers in the streaming age. Both of these are long-shots but within the realm of reality.
In short, there is potential to have an upside on your principal, the downside on your principal is relatively low, you get a reliable 7% dividend yield, and your spare cash won’t be devalued if inflation picks up.
Please note that if you actually need cash as a rainy day fund or to fund your day-to-day life (i.e. a house purchase), none of this applies.
Disclosure: I am long T.
