For some investors, dividends are incredibly important. The cash flow from dividends can be a source of retirement income or funneled back into other investments. As a result, many investors fall into the trap of only looking at dividend yield (what percentage of the stock price is paid out in dividends each year). When this happens, investors might purchase shares of companies at risk of cutting their dividends without knowing their full backstory.
However, two high-yielding stocks that don't seem like as much of a risk to cut their dividends are Verizon (VZ 1.17%) and AT&T (T 1.02%). Additionally, they both have sky-high yields, with the two stocks yielding 7.8% and 7.3%, respectively. So, between the two, which is a better buy?
The dividends both look relatively safe... for now
Many investors have reservations about stocks with greater than a 4% or 5% dividend yield, as it could be a sign the company may be close to cutting its dividend because it cannot afford it. However, this risk can easily be assessed by examining the dividend payout ratio or how much earnings the company pays out to investors.
Over the past 12 months, Verizon and AT&T paid out $10.9 billion and $8.1 billion to investors, respectively. Verizon generated net income of $21 billion, so its dividend payout ratio is 52%. This is right in the acceptable range for many companies, so it appears to be quite safe.
AT&T isn't in the same boat. Its net income is negative, as AT&T has lost $8.8 billion over the past 12 months. However, the net loss includes many large one-time charges (like when AT&T took some writedowns during Q4 2022). Because of that, free cash flow (FCF) is often used with the dividend payout ratio instead of net income, as it's a better picture of what is truly going on with cash flows. From that standpoint, AT&T has paid out a mere 45% of FCF over the past year. Verizon's dividend payout ratio using FCF works in the other direction, as it paid out 88% of its FCF.
Using one measure of profitability can be more useful for AT&T or Verizon when assessing the dividend's safety. With each company still producing the FCF needed to fund it, I'd say both dividends are safe right now. But why are they so high?
AT&T and Verizon have had high dividend yields for a while, so this is normal. However, thanks to Treasury yields rising, investors have abandoned riskier stocks for guaranteed payments in Treasuries. Just look at the 10-year Treasury rate's rise compared to their stock prices. It's nearly a perfect inverse relationship.
With investors finally able to generate a meaningful yield from Treasuries, the stock prices of these two companies have rapidly deteriorated because there have been more sellers than buyers. Eventually, Treasury rates will fall, making these two attractive again, but there is a caveat in that.
The debt load may be too much to bear
Both Verizon and AT&T have debt-heavy operations. Because they were used to operating in times of low-interest rates, they built a lot of infrastructure using cheap debt. Now that rates are up, new debt comes with much higher interest rates. As a result, Verizon and AT&T may not be able to grow like they used to, or their debt repayments may become too burdensome and cause the dividend to be cut. Alongside the interest rate rise, this has concerned investors, as neither company is growing fast in the first place (Verizon's Q2 revenue shrank 3.5%, and AT&T's increased a mere 1%).
This makes these two tricky investments to assess, as there are many moving pieces between them. As a result, I don't think either company is the better buy. While the dividend yields may be attractive and relatively safe right now, there are just too many unknowns about how these two will function in high-interest-rate environments. Plus, both companies have been long-term losers to the broader market, making them even less attractive investments.
If you're looking for yield, the 10-year Treasury bond may be the best option, as AT&T and Verizon are both in a precarious situation with an uncertain yield future.
