When dividend stocks offer high yields, investors primarily take notice for a couple of reasons. One, they could find the yield enticing. A generous dividend, with respect to the share price paid, can become a significant source of income for their portfolios. The other reason, antithetically, could be a general concern why the stock price is lagging, thus pushing up its yield -- in other words, is the dividend safe?
Verizon Communications (VZ 1.17%) is one high-yielding stock that investors are certainly asking questions about. While there's no doubt that locking in a high yield for one of the nation's top telecom providers could be a great move, there's also the nagging feeling that perhaps there's some risk here that investors are overlooking, and that maybe the yield is too good to be true.
The company's CEO recently weighed in on the unusually high yield.
Why Verizon's yield is so high
Verizon's dividend yield isn't usually 7%. This isn't normal territory for the stock. Historically, Verizon has been paying around the 4% mark.
In a recent interview with Yahoo! Finance, CEO Hans Vestberg talked about the company's yield and his thoughts as to why it was as high as it is today. He highlighted three reasons for the stock's poor performance and why the payout is so high:
- The company didn't perform well in 2022, and there have been many changes in the management team this year.
- Investors are valuing the industry at lower multiples.
- He believes investors see the stock as comparable to bonds given its continued dividend growth. And with interest rates rising, investors have shifted to bonds.
Vestberg did say, however, that he believes the company is on the right track in light of its recent results.
Will Verizon stock to better next year?
Verizon's stock has been struggling this year, but there are reasons it could do better in 2024. One is that its share price trades at just 8 times its trailing earnings; that's well below the earnings multiple it has averaged in recent years. And with the Fed suggesting that there may be three rate cuts next year, lower interest rates (which could sway investors away from bonds and back into the equity markets) combined with a low valuation for Verizon's stock should make it an attractive option for both value and dividend investors.
VZ PE Ratio data by YCharts.
Sooner or later, investors won't be able to ignore the value the stock possesses, especially as Verizon continues to post strong results and as interest rates come down. In October, the company announced it was increasing its forecast for free cash flow by $1 billion for the year, now projecting $18 billion in free cash.
The company also has a potential growth catalyst on the way because it is reportedly partnering with Netflix and Warner Bros. Discovery to offer bundled streaming options of their ad-based plans at a cheaper rate than what consumers could buy them for separately. And Verizon will share in the revenue from the deal.
Should you buy Verizon's stock?
Verizon is one of the best dividend stocks investors can buy right now. It's a leading company in the telecom space, and with a payout ratio of around 53%, its dividend isn't in any danger. With a low valuation and potentially lower interest rates next year, it may just be a matter of time before investors start buying up this incredibly cheap stock.
