Dividends are a terrific way to make income outside of your main jobs, and definitely once you're retired. Millions of people count on that quarterly check to make ends meet or as money for life's little extras.
High-yielding Verizon Wireless (VZ 1.17%) is a battleground stock among income investors. It's followed by many, and most people have a strong opinion about it. It's important to put aside emotions in investing and focus on what will ultimately get you to your goals most efficiently. Is Verizon that stock?
Is Verizon's dividend yield worth it?
Verizon's dividend yield is currently 7.8%, which is tempting. After all, very few stocks pay this well. But you shouldn't pick stocks by dividend yield alone. Long-time and well-respected financial writer Raymond Devoe once stated in The Wall Street Journal that "more money has been lost reaching for yield than at the point of a gun." Is he right? There is no conclusive proof of this, but I believe he's definitely on to something.
As I have said before, dividend growth is much more important than yield. Here is a terrific example comparing Verizon's monster yield with Texas Instruments' (TXN 1.27%) monster growth. Texas Instruments stock currently yields just under 3%, which is in its historical range. A decade ago, Verizon had over a 4% yield, and Texas Instruments just 2.4%. But Texas Instruments was a much better buy.
Texas Instruments' free cash flow growth has allowed it to raise the dividend for 19 consecutive years -- more than 300% over the last 10, compared to Verizon's 23% growth. The stark contrast is depicted below.
TXN Dividend data by YCharts
Because of the difference in dividend growth, an investor's current yield on the price paid for these stocks 10 years ago is 12.5% for Texas Instruments and just 5.3% for Verizon. But that isn't all. Texas Instruments stock has also appreciated tremendously, and investors have made over 445% return compared to just 9% for Verizon, as depicted below.
VZ Total Return Level data by YCharts
Given inflation, Verizon holders have lost value, and the opportunity costs are gigantic.
OK, so the last 10 years weren't very good. But what about investing in Verizon today?
Is Verizon a good dividend stock?
Phone carriers seem like an excellent investment. Almost everyone uses mobile phones, and there are only a few carriers. The problem is two-fold. First, as I said, almost everyone in Verizon's all-domestic market already uses these phones. There isn't a tremendous growth market of net new users, so the major phone carriers must compete heavily for the existing market.
This means less pricing power and fewer growth opportunities. Verizon's operating income declined year over year in 2022 by 6% and has been basically even for the first six months of 2023, while total revenue is down 3%.
Second, the business is very capital-intensive. This means that the company spends a lot of money on property and equipment (CapEx), which isn't expensed on the income statement, but significantly lowers free cash flow (the money left over to spend on things like dividends). Because of this, Verizon has borrowed a ton of money over the years. It now has long-term debt of $153 billion, including 15 billion due within 12 months.
This isn't the recipe for growth, sustainability, and rewards for investors. The yield is nice, but the total return will probably lag behind the market and dividend growth stocks like Texas Instruments. Also, with rising interest rates, an investor can buy a risk-free Treasury bill paying more than 5%.
This makes Verizon much less attractive.
Is Verizon's dividend safe?
In 2022, Verizon produced $37 billion in cash from operations but spent $29 billion on CapEx, licenses, and collateral. Dividends paid were $11 billion. The math is easy. Verizon did not make enough free cash flow to cover the dividend and was forced to issue more debt. This was even more pronounced in 2021, and the pattern is similar thus far in 2023.
Management stated on the second-quarter 2023 earnings call that its first two priorities are investing in the business and protecting the dividend. Since a dividend cut would likely hurt the already floundering stock price, Verizon is unlikely to cut it unless it is forced to. However, money is extremely tight, so an unforeseen headwind could leave it no choice. Because of management's commitment, the dividend will probably not be cut soon, but it is certainly not out of the question.
Here's the bottom line. Verizon's enticing yield is risky and much less attractive as the risk-free rate rises. Income investors should consider dividend growth stocks, Treasury bills, and CDs as alternatives. As seen above, Texas Instruments may also be a better choice.
