Investors shouldn't be afraid to pay a premium price for a quality stock. That doesn't mean, however, you must do that to get an asset worth holding. Warren Buffett's made his fortune not just by steering Berkshire Hathaway (BRK.A -0.28%) (BRK.A -0.28%) into the right stocks, but by buying the right stocks at the right times.
In this vein, one of Berkshire Hathaway's key holdings is cheap enough now that you should consider adding it to your portfolio as well. That stock? Telecom giant Verizon Communications (VZ -1.50%).
An impressive dividend pedigree
Admittedly, it's not a terribly exciting pick. The telephone business is fairly commodified, and Verizon's poor share price performance since 2020 -- a period when most other stocks soared -- doesn't exactly bolster the bullish argument.
Don't be misled by the shares' recent performance or the boring nature of the business, though. This stock has something to offer investors willing to give it time to do its thing, for a couple of reasons.
Chief among these reasons is the dividend. While the stock's price has been peeled back over the course of the past couple of years, management has continued to nudge the dividend payment upward. Its current annualized payout of $2.56 per share is nearly 11% higher than Verizon was distributing five years back, and 28% more than the stock's payout a decade ago. Indeed, Verizon has upped its dividend payment annually for the past 15 years.
This isn't an insignificant detail. Assuming you had reinvested those ever-increasing payments in more shares of Verizon, a $10,000 investment in this company 10 years ago would be worth nearly $22,000 today. Without reinvesting those dividends, the figure would be a hair over $20,000.
Either way, your results would have trailed the performance of the S&P 500 (^GSPC 0.57%) over the past decade. The bulk of the index's lead, however, only materialized within the past couple of years when other stocks surged while telecoms fell out of favor. In that most telecoms are also dividend payers, the prospect of rising interest rates has also been working against Verizon.
That it operates in the same industry as beleaguered AT&T (T -1.25%) hasn't done much to improve investors' sentiment about Verizon either, even though the two companies are considerably different. AT&T has in recent years been bogged down by some ill-advised media and entertainment investments. With or without AT&T's missteps, though, the market grew increasingly concerned that Verizon's big spending on its fiber-optic network wouldn't be worth it.
Should the economy run into prolonged headwinds or even a full-blown recession, look for a resilient telecom industry to swing back into favor again with investors as they shed their more aggressive and vulnerable growth picks.
Technologically ready for whatever awaits
The other key reason Verizon could be a more profitable pick from here than you might believe -- and one likely reason Buffett is still hanging on to it -- is that the company is more than ready for the tech evolution that will soon be in full swing due to the widespread availability of 5G wireless connectivity.
Investors have seen regular updates of wireless connections since the first smartphones hit the market in the early 2000s, from the dial-up modem-like speeds that prevailed then to the impressive 4G speeds that are the standard now. The advent of 5G, however, promises another quantum leap forward. Using this fifth-generation architecture, data can be transmitted between 10 and 100 times faster than 4G connectivity can support.
This is a game-changer. Suddenly, innovations like wireless fixed broadband and the massive expansion of the Internet of Things are possible.
And Verizon is working hard on both. During last month's investor day conference, management said the company expects to add around 5 million fixed wireless broadband customers to its customer count by 2025; it's already capable of serving 30 million homes with this 5G-based service. Meanwhile, Verizon already offers turnkey Internet of Things solutions for businesses that leverage 5G connections.
In short, the company is ahead of the curve in thinking about the future -- and now current -- needs of its corporate customers.
The key to both offerings will be Verizon's expansive fiber-optic network -- a project that many investors jeered while it was being built out. There's not enough bandwidth or radio frequency spectrum to power these initiatives aerially. By offloading most of the data transmission work to physical lines, though, Verizon's network should be able to handle anything thrown at it.
It's true that the 5G evolution hasn't taken off as rapidly as some pundits and industry watchers predicted. It is coming, though, and this may well be the year it gains traction in earnest, driving more growth than most investors foresee.
Here's how cheap Verizon shares are
While the company's dividend history and readiness to deliver aren't in dispute, is there a meaningful amount of room for the stock to price in this potential? In a word, yes.
As of the latest look, Verizon shares are valued at less than 10 times this year's expected earnings per share, and the dividend yield stands at 4.8%. That gives it a lower valuation than both the broad market and its peers (after making the proper adjustments for AT&T following its recent sale of WarnerMedia to Discovery), and a higher yield as well.
There's arguably no company in the telecom industry more deserving of a richer valuation than it sports than Verizon. Buy it today, and if and when the market finally reaches this conclusion, the stock could bring you handsome returns. The key is simply leaving the shares alone long enough to let time do the heavy lifting -- like Buffett does.