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Why you shouldn't always chase dividends

Interest rates are still relatively low, so what's an income-seeking investor to do?

Well, there are always dividends. And no sector is paying more in dividends as a whole than telecoms.

The benchmark U.S. Treasury 10-year note is yielding 2.54 percent these days. And, while the S&P 500 index's dividend yield is about 2 percent, the S&P's telecom services sector's yield is now 4.9 percent. That's more than 1 percent higher than utilities. Plus, the sector's price of 14.3 times earnings makes it second only to financials as the cheapest of the lot.

It all looks perfect—until you look a little closer.

The five stocks in the S&P's telecom sector are dominated by the two giants of the industry, AT&T and Verizon. Though their dividends yield 5.2 and 4.3 respectively, their stocks have underperformed the overall S&P 500 index. In fact, their current dividend yields are just about equivalent to the percentage points their stocks lost over the past 12 months.

Year-to-date returns

1-Year returns

5-Yea returnsr

AT&T

0.1%

-5.6%

49.1%

Verizon

0.3%

-4.5%

80.4%

S&P 500

1.2%

20.1%

112.5%

But getting paid something respectable when Treasurys aren't paying that much isn't so bad, according to Gina Sanchez, founder of Chantico Global.

"Big dividends clearly don't make this story," said Sanchez, a CNBC contributor. "However, because interest rates have remained low, this has been a good play."

Between AT&T and Verizon, Sanchez thinks AT&T is the better pick because of its acquisition strategy. Earlier this week, AT&T announced plans to acquire satellite-TV provider DirecTV for $48.5 billion.

(Read: TV picture looks fuzzy for consumers in AT&T-DirecTV deal)

"Continued growth in a very highly competitive industry is going to be necessary," Sanchez said. "And as long as interest rates remain low, then this dividend looks absolutely delicious. But you will have to keep an eye on rates because that will have an effect on investor interest in this sector."

Investors may want to hold off on buying AT&T's stock until it gets lower, suggests global technical strategist Richard Ross of Auerbach Grayson. And, it might just get lower if his charts of are correct.

"They say there's no free lunch on Wall Street, meaning that higher dividend yield is commensurate with higher risk in the stock," said Ross, a "Talking Numbers" contributor. In the case of AT&T, that risk is a low-growth environment, he added.

(Watch: Verizon CEO quashes Dish Network merger rumors)

After hitting a double bottom earlier in the year, AT&T's stock has rallied but came up to resistance near its previous November highs just below $37 per share. Its longer-term chart may give some indication of where the stock is headed.

"I would look for a retest of that longer-term 200-week moving average" currently at $32.46 per share, said Ross. "I would be a better buyer of the stock down there. But, I wouldn't chase it here. I wouldn't chase yields and I wouldn't chase the stock.

To see the full discussion on AT&T, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.


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