Passive income is a beautiful thing. You can live off it, letting it pay your bills, or reinvest it to compound your income stream over time. But knowing that you will get paid is key to stress-free dividend investing, no matter how you use it.
Telecom giant Verizon Communications (VZ -0.53%) is arguably at the top of the list regarding reliable dividends with fat, juicy yields. This stock pays a 4.8% dividend yield that you can rest easy with, knowing that the check will keep coming each quarter. Let's take a closer look at why you can be sure of Verizon's payout and at what could propel the stock further in 2022.
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Verizon is part of the tiny telecom club in the U.S.
The telecommunications industry is worth an estimated $1.7 trillion worldwide, and about one-third of that market is in the United States -- roughly $583 billion. But just a tiny handful of companies control this big-money industry in the U.S. Verizon is part of the oligopoly of U.S. telecom, meaning that it's an industry with limited competition.
This small group is made up of Verizon, AT&T (T 1.88%), and T-Mobile, which together control about 99% of the U.S. market. Why don't competitors emerge to challenge them? These three companies spend billions of dollars each year building and maintaining their networks and have done so for decades. For example, Verizon spent in the range of $18 billion in 2021. These investments include spectrum licensing, cell tower expansion, fiber-optic cable installation, vehicle fleets, and satellites.
A competitor would have to invest many billions of dollars to build the infrastructure needed to offer a similar service and network coverage, just in the hope that it might displace one of these incumbent companies. It's just not very logical to try, which is why nobody does.
Iron-clad financials support the payout
So why is Verizon's dividend so dependable? Consider the household services that run through your smartphone these days. About 84% of U.S. households own a smartphone, which they use to pay bills, make commercial transactions, play games, go on social media, or contact friends and family. It's a tool people constantly use, which makes it very important. Many people consider their phone service to be as vital as groceries or their residence.
VZ net income (TTM). Data by YCharts. TTM = trailing 12 months.
Look at how Verizon's net income (its bottom-line profit) continues climbing regardless of the unemployment rate. Simply put, people pay their phone bills.
But let's say that Verizon's business faces an extraordinary adverse economic scenario, where it sees profits fall dramatically. Verizon's dividend payout ratio is just 47%, meaning that its profits could be cut in half before the company would struggle to afford to pay its dividend. With that much room in its payout ratio, and its customers paying no matter what the economy is doing, investors should feel good about Verizon's ability to pay its dividend.
5G brings long-term upside at a cheap valuation
Verizon isn't a very fast-growing company; its revenue has gone up an average of just under 2% over the past decade. But 5G continues expanding across the country, and some exciting possibilities could create growth opportunities. For example, 5G networks could be up to 10 times faster in real-world applications than previous generation 4G. This speed could unlock a lot of uses in new technologies that are just now beginning to flourish.
Over the next decade, we could see things like autonomous driving, growth in streaming, intelligent devices in industrial settings, and the Internet of Things (IoT) create demand for more connectivity. And Verizon's network is one of the significant pieces of infrastructure that all of it could run on.
Verizon's business is primarily consumer devices right now, like phones, tablets, and watches, but long-term investors will want to look for these potential opportunities to materialize.
Meanwhile, the stock trades around $53 per share, creating a price-to-earnings (P/E) ratio of just under 11 using analyst earnings-per-share estimates for the full 2021. The stock's long-term average P/E ratio is between 14 and 15, so shares are attractively valued at the moment, especially looking forward to what 5G networks could do for growth. In the meantime, Verizon's 4.8% yield is one that you can pocket and sleep like a baby doing it.
