This Dividend Trap Is Yielding More Than 4%
AT&T's 4% yield and steady payout history make it look like a reliable income play, but the company's own CFO revealed a detail on the latest earnings call that should make dividend investors look twice before buying.
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Income investors love a familiar name paying a fat check, and few names in the S&P 500 fit that description more comfortably than AT&T (NYSE:T | T Price Prediction). The stock traded around $25.21 on Sept. 28 with a 4.4% dividend yield, with a trailing P/E of 8 and a chart that has quietly returned 22.98% over five years. On the surface, this looks like the safest high-yield payer in telecom. The company’s own numbers say the payout has less breathing room than the headline coverage ratio suggests.
A dividend becomes unsustainable when the cash going out (payouts, CapEx, buybacks, interest) starts to press against the cash coming in, and management has to fund the shortfall with debt or asset sales. Coverage ratios on paper can look fine while the underlying free cash flow gets stretched thinner every quarter. That is the exact tension inside AT&T right now.
Why the Yield Reads as Safe
The optics are genuinely reassuring. AT&T pays a 27-cent quarterly dividend, or $1.11 annualized, and has held that rate steady across every ex-dividend date from January 2022 through July 2026. Full-year 2025 adjusted EPS came in at $2.12, and 2026 guidance sits at $2.25 to $2.35. Against that earnings base, the payout ratio on adjusted EPS lands near 52%, well inside what a mature telecom can carry.
Operating momentum is real. Second-quarter 2026 service revenue rose 2.7% year over year, adjusted EBITDA rose 5.2% and the company added 432,000 postpaid phone net adds and 646,000 internet net adds in the quarter. A MarketWatch analyst piece earlier this week even framed AT&T as the smartest bet in the wireless sector. So where is the warning?
Where the Coverage Gets Thin
The right lens for AT&T is free cash flow after capex, interest, and the competing shareholder-return commitments the company has already promised, rather than EPS. On the Q2 2026 call, CFO Pascal Desroches confirmed that planned share repurchases and dividend payments will total approximately $18 billion in 2026, against a full-year free-cash-flow outlook of $18 billion plus. Management itself called that “essentially 100% of our outlook for free cash flow.” There is very little slack for a miss.
That slack matters because capital investment is climbing, not falling. Second-quarter CapEx was $6.1 billion, versus $5.1 billion a year earlier, and full-year capital investment guidance stands at $23 billion to $24 billion annually through 2028 as fiber deployment accelerates toward 60 million locations by 2030. Buybacks are being pushed higher in parallel: the company now targets roughly $10 billion of repurchases in 2026, up from a prior $8 billion. Every dollar of buyback is a dollar not available to defend the dividend if free cash flow disappoints.
Balance Sheet Is Going the Wrong Way
Leverage is the second flashing light. On June 30, net debt to adjusted EBITDA sat at 2.68x, above the company’s stated 2.5x target. Total debt on the balance sheet stood at $162.888 billion, with total liabilities of $301.925 billion. Interest expense was up 13.8% year-over-year in Q2 2026.
Then comes the EchoStar spectrum purchase (roughly $23 billion) and the Lumen fiber acquisition ($5.75 billion). Desroches said net leverage will increase to the 3.2x range following the close of the EchoStar transaction, then return to a level consistent with the 2.5x target within approximately three years. Higher leverage during a period when the payout, the buyback, and the fiber build all need funding is the definition of a stretched capital plan.
A Yield That Is Elevated Because the Price Fell
The dividend rate itself has not grown. AT&T last reset the payout to 27 cents in January 2022, down from $0.52, and has held it flat since. Management guides to maintaining the $1.11 annualized dividend through 2028 with no raise attached, despite double-digit adjusted EPS growth. A dividend “held through stress” is a signal, not reassurance, and it is one of the classic warning signs we cataloged in a free report on dividend traps. The yield you see today is partly a function of price weakness: the stock is down 5.89% over the past year. Price-driven yield is a warning, not a feature.
The legacy business is the quiet accelerant. Legacy-segment service revenue fell 26% year over year, legacy EBITDA fell about 46% and AT&T expects legacy EBITDA to turn negative after 2027. That is a live cash-flow drag heading straight into the years when leverage is supposed to come back down.
What Would Have to Go Right
For the payout to hold comfortably, AT&T needs three things: free cash flow to reach the guided $19 billion in 2027 and $21 billion in 2028, cost savings to hit the promised $4 billion annual run rate by the end of 2028, and the EchoStar-driven leverage spike to reverse on schedule. Miss on any two of those and the board’s own words become relevant. CEO John Stankey told analysts, “This is a decision for the board. It’s not my decision to make exclusively.”
The single falsifiable metric to watch is quarterly free cash flow versus the combined dividend-plus-buyback run rate. If FCF trails the shareholder-return cadence for two consecutive quarters while capex stays elevated, the buyback gets cut first, and the dividend becomes the next lever the board can pull. A cut usually takes the share price with it, which is why yield alone is never a thesis. On the numbers AT&T itself publishes, this dividend is simply covered by less margin than the 52% payout ratio implies.
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Joel South covers large-cap stocks, dividend investing, and major market trends, with a focus on earnings analysis, valuation, and turning complex data into actionable insights for investors.
He brings more than 15 years of experience as an investor and financial journalist, including 12 years at The Motley Fool, where he served as an investment analyst, Bureau Chief, and later led the Fool.com investing news desk. He has also co-hosted an investing podcast and appeared across TV and radio discussing market trends.
