Hey there, bargain hunter.

Inflation just printed at 4.2% for May 2026 – the highest reading since April 2023. The 10-year Treasury is sitting right around 4.53% as of this week. That spread between the risk-free rate and what CPI is doing to your purchasing power? Basically nothing. You are earning almost zero real return on the safest asset in the world.

That is the environment we are working in right now. And it changes how you have to think about where cash flows come from.

Growth stocks without dividends face a straightforward math problem in this environment. When the discount rate rises and inflation stays elevated, future earnings get compressed in present-value terms. The stocks that have held up – and the ones drawing fresh interest – tend to be businesses that throw off consistent, covered cash to shareholders today. Not promises. Cash.

What the Market Is Doing

Rotation into income-generating names has been grinding forward all spring. The energy shock tied to the Iran conflict pushed gasoline up roughly 28% year-over-year through April, which is a big part of why headline CPI reaccelerated. Core CPI – excluding food and energy – rose just 0.2% month-over-month in May, undershooting forecasts. That tells you the inflationary pressure right now is concentrated and externally driven, not broadly embedded in services. Markets took some comfort in that distinction. Treasuries barely moved on the release.

But the Fed is still expected to hold rates steady through the June 16–17 meeting, with futures pricing in a 25 basis point hike as early as December. That keeps the rate ceiling elevated and keeps pressure on growth multiples. The income hunting continues.

The Stock: AT&T Inc. (NYSE: T)

AT&T is not a glamour stock. That is exactly the point.

The company operates one of the largest wireless networks in the United States, connecting roughly 74 million postpaid and 17 million prepaid phone customers. Wireless contributes nearly 70% of total revenue. The rest comes primarily from fixed-line enterprise services – private networking, security, voice, wholesale capacity – plus a growing residential fiber broadband segment serving around 15 million customers. AT&T has a meaningful presence in Mexico as well, though that operation accounts for only about 3% of revenue and is largely a footnote for income-focused investors.

What matters for the Cheap Investor thesis is simple: does this business generate enough predictable cash to pay the dividend, reduce debt, and stay relevant? The answer, at least based on current numbers, leans yes – with real caveats.

The Numbers

• Dividend yield: approximately 4.88% forward, with a quarterly payout of $0.2775 per share ($1.11 annualized)
• Payout ratio (free cash flow basis): roughly 21–22% – conservatively low, meaning the dividend has significant room before it becomes stressed
• Payout ratio (earnings basis): approximately 37.7% as of the most recent reported quarter
• Q1 2026 revenue: $31.5 billion, up 2.9% year-over-year, beating the $31.2 billion consensus estimate
• Q1 2026 adjusted EPS: $0.57, up roughly 12% year-over-year, beating the $0.55 estimate
• Q1 2026 adjusted EBITDA: $11.8 billion, up 2.3%, with margins expanding to 37.7%
• Q1 2026 free cash flow: $2.5 billion – at the high end of AT&T’s own $2.0–$2.5 billion guidance range
• Full-year 2026 FCF guidance: $18 billion or better
• Full-year 2026 adjusted EPS guidance: $2.25–$2.35
• Capital investment: $23–$24 billion expected annually
• Fiber locations passed: over 37 million, with 584,000 new internet connections added in Q1 2026

Slight tangent, but worth noting: AT&T sold its 70% stake in DirecTV to TPG. That exit cleaned up the balance sheet optics and removed a structurally declining asset from the conversation. The company then turned around and acquired Lumen’s Mass Markets fiber assets – a move that adds to the long-term fiber footprint but also added to near-term debt levels, which drew some investor scrutiny after Q1 results.

Net debt was reported at $120.3 billion as of mid-2025 and has remained elevated. That is the single biggest risk here and we will come back to it.

Is the Yield Actually Cheap?

At roughly 4.88% forward yield, T is yielding more than the 10-year Treasury right now – and unlike a Treasury, AT&T’s dividend is backed by $18 billion-plus in annual free cash flow guidance. The payout ratio on a free cash flow basis is around 21%. That is a wide coverage cushion. The dividend would need sustained, dramatic deterioration in the business before it became genuinely unsafe.

The 5-year dividend growth rate is negative – down roughly 13% over the past five years – which is a fair criticism. AT&T cut its dividend in 2022 after the WarnerMedia spinoff. The current $0.2775 quarterly payment has held flat since then. No growth. But no further cuts either, and the coverage metrics suggest stability rather than stress.

Compared to the 10-year at 4.53%, T’s ~4.88% yield offers a modest premium with the added potential of capital appreciation if rates eventually pull back. The stock trades at roughly 10.9x forward earnings – not expensive, not screaming cheap either. One analyst consensus target puts the average price objective around $30.53, implying roughly 23% upside from recent levels. That is moderately bullish, not a blowout case.

What Could Go Right – and What Could Go Wrong

The bull case is straightforward: AT&T executes on its fiber buildout – targeting 50 million customer locations by 2030 – grows its convergence rate (currently 42% of fiber households also take AT&T wireless), expands EBITDA margins, and uses excess free cash flow to steadily reduce debt and eventually grow the dividend. Adjusted EBITDA is projected to grow 3–4% in 2026, accelerating to 5% or more by 2028. EPS is guided to grow at a double-digit compound rate through 2028. If those numbers hit, this is a very different stock in two years.

The base case is that AT&T grinds along: low-single-digit revenue growth, stable dividend, slow debt reduction. Revenue growth of 1–2% annually. Investors collect the ~4.88% yield and wait. Not exciting, but defensible in an environment where growth stocks are facing valuation compression.

The bear case is worth taking seriously. The debt load is real and heavy. Net leverage sat at 2.71x EBITDA after Q1 2026 and is expected to peak near 3.2x post-EchoStar acquisition before declining. Legacy Business Wireline revenue continues to erode – that segment’s EBITDA is guided to decline in the mid-teens range in 2026. And AT&T’s wireless subscriber economics drew scrutiny after Q1, with postpaid phone churn rising to 0.98% – up from the 0.85% range seen in stronger quarters. If competition from T-Mobile intensifies or macro conditions soften consumer spending, subscriber quality could slip further.

The Cheap Investor Scorecard

• Dividend yield vs. CPI (4.2%): yield covers inflation at 4.88% – narrow but positive. Watch this spread.
• Dividend yield vs. 10-year Treasury (4.53%): premium of ~35 basis points. Not wide, but equity premium exists.
• Free cash flow payout ratio: ~21%. Very conservative. Dividend is well-covered.
• EPS payout ratio: ~37.7%. Healthy room.
• Revenue growth: 2.9% YoY in Q1 2026. Low but positive.
• EBITDA growth: 2.3% YoY. Modest margin expansion intact.
• Net leverage: 2.71x, guided to peak ~3.2x. Elevated but declining trajectory expected.
• Fiber expansion: 37M+ locations, 584K new internet adds in Q1 2026. Execution on track.
• Convergence rate: 42% of fiber households also on AT&T wireless. Cross-sell working.
• Legacy drag: Business Wireline in structural decline. Not a secret, but a real ongoing headwind.

Action Plan

If you are building a position for income in this inflationary environment, AT&T at current levels is a reasonable starting point – not a full allocation in one shot. The debt situation and the legacy revenue declines are real risks that require watching. A scale-in approach makes sense: an initial position now to lock in the yield, with a second tranche if the stock pulls back on any macro weakness or earnings volatility.

The dividend is the anchor. As long as free cash flow stays north of $16–18 billion annually – and guidance currently calls for $18 billion or better in 2026, rising above $21 billion by 2028 – the payout is not at risk. That is the number to watch every quarter.

What I am less sure about is the ceiling. AT&T is not a high-conviction growth bet. It is an income placeholder in a rate environment that makes the yield worth owning. Whether it becomes something more depends entirely on whether the fiber convergence strategy delivers the subscriber numbers and margin expansion the company is promising through 2028. The parts are in place. The execution risk is real.

Full breakdown and ongoing coverage at the link below.

– The Cheap Investor