If you like high-yield dividend stocks, you probably already own or have considered buying AT&T (T -0.44%) and Verizon (VZ -0.10%).
The telecom giants are among the best-known high-yield stocks and are generally seen as classic blue chips. Verizon is a member of the Dow Jones Industrial Average, and AT&T was one for decades before being ushered out in 2015.
Both stocks are also highly regarded as dividend payers with long histories of paying dividends. AT&T currently offers a 7.5% dividend yield, and Verizon is paying a yield of 8.5%.
The two telecom stocks also look dirt cheap according to their single-digit price-to-earnings ratios, but the stocks haven't been the rewarding investments income investors expected.
Instead, they've been yield traps as their share prices have consistently fallen over the past several years.
As you can see from the chart below, both stocks have lost value for investors over the last five years and are down even with dividends reinvested.
Data source: YCharts.
Despite their generous dividend yields and cheap valuations, AT&T and Verizon are burdened with huge debt loads, partly a result of poor acquisitions, that have restricted their financial flexibility and ability to grow.
AT&T has chronically underinvested in infrastructure, throwing money away on deals for DirecTV and Time Warner instead, while Verizon overly concentrated its 5G network in one type of spectrum that gave poor 24/7 connectivity. As a result, the two companies opened the door for T-Mobile to gain market share and outperform both of them.
If you're looking for a cheap stock with a high dividend yield, there's a much better option than AT&T and Verizon to buy today.
Image source: Getty Images.
Take advantage of a different crisis
Regional bank stocks tumbled in March as Silicon Valley Bank and Signature Bank failed and later pushed First Republic over the edge.
A combination of heavy lending to the tech sector, which got crushed during the 2022 stock market sell-off, and exposure to long-dated Treasuries whose values plunged as interests rose contributed to the demise of those banks.
However, at this point, any contagion from the crisis has been contained, but much of the regional banking sector has yet to bounce back.
Take Truist (TFC -0.75%), for example. Shares of the Charlotte, North Carolina-based bank, primarily focused on the southeastern U.S., have fallen 32% this year, largely due to a plunge during the regional banking crisis in March.
Following the sell-off, Truist now has a similar price-to-earnings ratio and dividend yield to AT&T and Verizon, but the business has much greater prospects for recovery than the two telecoms.
Currently, Truist stock trades at a price-to-earnings ratio of 6.7 and offers a dividend yield of 7%.
The company is streamlining the business, cutting costs, and building capital in response to tighter capital requirements resulting from the regional banking crisis.
According to reports from Semafor, Truist is planning to sell the remaining 80% stake in its insurance business, which should bring in $10 billion for the company, cash that will shore up its capital ratios and could be paid out to shareholders through dividends and share buybacks.
Truist also trades at a discount to many of its peers, though it easily passed the Federal Reserve's stress test with a 6.7% capital ratio in a hypothetical crash, above the Fed's minimum of 4.5%.
Why now is the time to buy
Banks are cyclical businesses, especially regional banks, and selling the insurance business would make Truist more exposed to the cyclical nature of banking, leaving it with just a consumer and commercial banking division.
However, that cyclicality is another advantage over stocks like AT&T and Verizon, as we're somewhere near the bottom of the cycle. Interest rates are at or near their peak, and most banks now see just a risk of a mild recession, or no recession at all.
Telecom stocks tend to be recession-proof as smartphones and data are essential services. In other words, AT&T and Verizon should be thriving in the current environment, but that's not what's happening.
Once the economy is on stronger ground and businesses are confident in expansion, Truist should see steady growth, and the stock will recoup its losses from earlier this year and potentially go even higher.
Investors can capitalize on the sell-off now and get a 7% dividend yield from a stock that offers much more upside potential than AT&T and Verizon.
