Editor’s Note: The stock market is an absolute battleground right now—panic selling, jaw-dropping volatility, and fear gripping investors at every turn. But here’s the thing: while others are losing sleep, dividend growth investors are getting paid. Take Verizon (VZ), for example — a high-yield fortress that has not only weathered countless market storms but has raised its dividend for two decades. No matter how chaotic the market gets, Verizon keeps delivering cold, hard cash to its shareholders. That’s the power of investing in reliable, income-producing companies.
With this in mind, the following article originally appeared in our premium investing service, Dividends & Income Select. With markets in turmoil, there’s no better time to take advantage of our 14-day free trial and start getting our best dividend growth investing ideas.
High-Yield Opportunity: Verizon (VZ)
Investing, like anything in life, can be different things to different people.
We all have different tastes, personalities, temperaments, objectives, etc.
And when it comes to investing, it’s so important to know thyself.
If you have a certain objective with your money, you should consistently invest in a way that puts you in the best position to achieve it.
Output has everything to do with input.
With this in mind, I’d argue the most common long-term objective among investors is to become financially independent.
It’s all about being able to one day live completely off of investments – no active work or labor necessary ever again.
Certainly a worthwhile goal.
However, in order to make sure this gift of freedom is sustainable over the long term, it’s imperative to invest properly.
What does that lead to?
Well, it leads to living off of the income your investments provide.
Otherwise, if you slowly cannibalize your investments by selling off holdings, you incur the risk of one day no longer having anything else to sell and running out of money.
This is why dividends are the answer.
A dividend is simply a cash distribution from a company (out of its earnings) to its shareholders.
By collecting dividends – a share of the profits the businesses you’re invested in are generating – you’re monetizing your investments and keeping them fully intact…at the same time!
Better yet, there’s no active participation on your part.
It’s totally passive, bypassing the market altogether.
You don’t need to follow the market or time sales; the dividends roll in in a scheduled manner, making it easy to budget that totally passive income against your expenses.
If there’s an easier or better way to get paid in life, I haven’t found it.
Plus, qualified dividends are a tax-advantaged source of income.
One can earn a very healthy amount of qualified dividend income without paying any taxes at all.
Of course, this is all well and good, but the amount of capital necessary to live purely off of dividend income can be prohibitive to a lot of normal people.
This leads to tapping into wealth/principle.
Well, this is where high-yield stocks come in, as the higher yields they offer can greatly reduce the amount of capital necessary to produce enough dividend income to realistically live off of.
The difference between 2% yields and 8%, yields, for instance, is a 4x difference in capital requirements to throw off the same amount of dividend income.
Said another way, all else equal, it could mean you reach financial independence four times faster (assuming 8% rather than 2% yields).
In a sense, in this way, high-yield stocks can act like a time machine.
But even if you do achieve financial independence within an acceptable time frame, there’s still this invisible, insidious force working against you: inflation.
Because inflation is causing the price of nearly everything to slowly rise over time, your purchasing power is slowly being eaten away.
Fortunately, a lot of higher-yielding stocks out there represent equity in businesses that not only pay generous dividends but also regularly increase the size of those already-generous dividends.
Growth in your dividends and passive dividend income counters the ravages of inflation over time, protecting your purchasing power.
If you can achieve financial independence in a sustainable, tax-advantaged manner and also make sure your purchasing power gets protected against inflation, you’ve pretty much got it made in life.
With all of that in mind, I want to cover a high-yield dividend growth stock that can help you to cover your bills and make your life a lot easier…
Verizon Communications Inc. (VZ) is is an American multinational telecommunications conglomerate.
Founded in 1983, Verizon now has a $168 billion market cap.
The company reports results across two business units: Verizon Consumer, 76% of FY 2023 revenue; and Verizon Business, 22%. Corporate and Other accounts for the remainder.
Consumer has approximately 115 million wireless retail connections, 12 million broadband connections, and 3 million Fios video connections.
As one of the largest wireless carriers in the US (and the world, for that matter), this company is perfectly positioned to benefit from the rising demand for mobile data.
This rising demand stems from smartphone proliferation, an evolving nature of work (which is being done more remotely than ever before), and a massive change in the way society consumes information and entertainment (which is now being streamed, rather than broadcasted).
And with the 5G now widely accessible, there’s no going back.
Consumers demand high-speed data – both in mobile and fixed (at home) applications.
I would go so far as to say that a lot of people out there would sooner give up indoor plumbing before letting go of their smartphones.
That’s where we’re at as a society.
And this dependence on high-speed data is only becoming stronger, as everything from home appliances to our vehicles are becoming interconnected through IoT and communicating in a real-time nature – requiring high-speed data.
This further entrenches the major players like Verizon that provide the “digital pipes” to and from the Internet.
Moreover, Verizon is moving beyond wireless.
It’s now entering the territory previously reserved for the major cable companies.
Verizon is doing this by offering fixed wireless (FWA) – wireless technology that connects homes and businesses to the Internet by enabling fixed broadband access which uses radio frequencies instead of cables.
The company’s most recent quarter (Q4 FY 2024) showed more than 12 million broadband connections, up 15% YOY.
There’s no realistic future in which society demands less access to the Internet or slower speeds, which creates a lot of visibility around Verizon’s viability and revenue over the coming years.
And this also creates fertile ground for Verizon’s ability to continue funding its generous dividend to shareholders.
Dividend Yield And Growth
Indeed, just to show how generous it is, this stock yields a mouth-watering 6.8%.
Not the highest yield I’ve ever highlighted, no, but this is still nearly six times higher than the broader market’s yield.
This yield is also 140 basis points higher than its own five-year average.
When you can get close to 7% from the yield alone, that puts a nice floor underneath your investment.
It also means you can generate lots of income on even a modest asset base, making something like this suitable for those who need to accomplish certain financial goals (like financial independence) without massive wealth.
And it’s actually even better than it sounds.
If it were only the near-7% yield, that’d be quite nice.
Nice enough, I’d say.
But that’s not all.
Verizon regularly increases the size of its dividend to shareholders.
In fact, it’s increased its dividend for 20 consecutive years.
While the increases are small – typically in the 2% area each year – they help to offset rising prices from inflation.
When the price tags on seemingly everything keep getting bigger, it helps when your passive dividend payments also keep getting bigger.
Otherwise, if those payments aren’t getting bigger, they’re actually getting smaller (since inflation will slowly eat away at your purchasing power).
What this stock offers, then, is a ~7% yield to start off with, along with some of that purchasing power protection (through the dividend increases).
That means the high yield is, in a sense, “legit” (i.e., it’s not slowly shrinking in real terms).
It’s also fairly safe.
I say that because the payout ratio is 65.5%, indicating no issues whatsoever with Verizon’s ability to afford the dividend.
Verizon has been “good” for its large dividend for decades already, and I don’t see anything that threatens the company’s capacity to continue this over the foreseeable future.
This must be music to the ear’s of any investor who wants outsized, dependable dividend payments.
Revenue and Earnings Growth
Of course, Verizon is able to afford its outsized dividend to shareholders by providing consumers with in-demand, high-tech telecommunications services, allowing Verizon to generate the gobs of revenue and profit necessary to sustain its generous behavior.
The company grew its revenue from $131.6 billion in FY 2015 to $134.8 billion in FY 2023.
That’s a compound annual growth rate of 0.3%.
Not much top-line growth here.
This comes down to the fact that Verizon operates within a mature, saturated, and competitive industry.
And you can see a company that is doing over $130 billion in revenue per year.
It’s a gigantic operation, which leads me to my main point regarding Verizon’s stunted growth.
In some ways, Verizon is a victim of its own success.
So many people want and already have what the company offers that there is almost nobody new left to sell to.
Anybody (i.e., everybody) who wants a smartphone with a 5G plan already has this.
This means Verizon must try to gain market share, look for incremental price gains, and explore new growth verticals (such as the aforementioned FWA).
Meanwhile, over this 10-year period, earnings per share slightly decreased from $4.37 to $4.14.
This is basically flat earnings growth.
We can now see why dividend growth has been quite modest (although surely appreciated); Verizon’s profit simply hasn’t grown much over the years.
EPS has been oscillating around the ~4/share mark for many years now.
However, when you have more than 4 billion shares outstanding, doing $4/share in profit is incredible (this is over $17 billion in net income).
In absolute terms, Verizon is a raging success and doing big numbers.
But if we’re talking about relative growth from here, it’s admittedly a tough slog.
Still, the dividend itself, which leads to that alluring yield, is easily covered, even if it might not grow at a high rate.
For income-seeking investors willing to forgo some growth in order to get that income now, there’s nothing wrong with any of this.
To the contrary, it’s a near-7% yield backed by a large, extremely solvent enterprise providing millions of consumers with the services they demand and are willing to pay for.
And Verizon is adding to its roster of services.
As I’ve noted a few times now, Verizon is angling to take share in broadband by growing its FWA business.
The company noted this in its Q4 report for FY 2024: “Total fixed wireless access net additions of 373,000 in fourth-quarter 2024, growing the base to nearly 4.6 million fixed wireless subscribers. The company is well-positioned to achieve the next milestone of 8 to 9 million fixed wireless access subscribers by 2028.”
In my view, that’s highly encouraging in terms of the company’s ability to slowly move the needle.
Verizon has bolted a growing broadband business on top of a large, mature wireless business.
While I wouldn’t expect Verizon to grow materially faster than it ever has before, professional research at CFRA is calling for Verizon to compound its EPS at a 4% annual rate over the next three years.
Also, Verizon’s own guidance is aiming for 3% (at the top end) YOY adjusted EPS growth.
That puts the dividend on track for more of the low-single-digit growth shareholders have become accustomed to, protecting the purchasing power of that income.
With a sprinkling of new growth, along with that high yield approaching 7%, it’s a highly satisfying setup for a lot of income-hungry investors.
Financial Position
Verizon’s financial position is somewhat weak.
The long-term debt/equity ratio is 1.3, while the interest coverage ratio is hovering around 3.
Verizon currently carries approximately $121 billion in long-term debt, which is a lot of debt (even for a company of this size).
The balance sheet isn’t pretty, but it’s not a major surprise to see a lot of debt from a company that runs a capital-intensive business model which must support infrastructure buildouts for growth.
However, I’d point out that Verizon is on the other side of a very heavy spending/CapEx cycle (such as acquiring spectrum through auctions in order to build out 5G capabilities), and it can now enjoy the benefits of these investments.
With extraordinary investments behind it, the company has been deleveraging recently.
After peaking at over $140 billion in FY 2021, long-term debt has been on a downward slope and is now heading to below $120 billion.
This debt reduction is a sight for sore eyes, and I expect Verizon will continue to shore up the balance sheet.
Verizon’s unsecured debt does have investment-grade credit ratings: A-, Fitch; Baa1, Moody’s; BBB+, S&P.
While the balance sheet might just be the worst aspect of the business, the gradual improvement is super encouraging.
Profitability
Profitability for the firm is respectable.
Return on equity has averaged 25.6%, while net margin has averaged 13.8%.
The balance sheet has juiced ROE, but even ROIC typically comes in at somewhere around 10%.
Pretty solid metrics, in my view.
The debt load is sizable, and growth is muted, but Verizon still gives income-chasing investors plenty to be pleased by.
And with economies of scale, barriers to entry, built-out physical infrastructure, acquired spectrum, and a large share of a mature market, the company does benefit from durable competitive advantages.
Risks
But there are risks to consider.
Competition, regulation, and litigation are omnipresent risks in every industry.
Verizon’s risk around regulation primarily relates to spectrum and how it can hurt the company either way.
Regulators control wireless spectrum licensing – lower spectrum prices could invite new competition, whereas higher spectrum prices make it more expensive for Verizon to do business.
The competitive picture is somewhat mixed, as the industry is dominated by a few major competitors as part of a rational oligopoly (existing players aren’t incentivized to race to the bottom), but wireless technology has made it easier for new entrants to come into the industry and overcome lower barriers to entry.
The industry is extremely saturated and mature, leaving Verizon with limited opportunities to grow.
Verizon’s balance sheet is heavily indebted, which is made worse by elevated interest rates, and this weighs on the company’s flexibility regarding its cashflow.
While consumers are extremely unlikely to cut smartphone plans, even under financial duress, broad economic weakness could cause consumers to shop around and seek cheaper alternatives across wireless.
There is technological risk here, particularly as LEO satellites are being deployed at scale and becoming a viable competitive threat.
There are certainly risks present for Verizon, which is also true for any business out there.
But with the valuation so low, a lot of risk is being priced in.
Valuation
Verizon’s stock has a P/E ratio of 9.9.
That is extremely low in absolute terms, although this stock tends to command low multiples because of the low growth and high debt load.
For example, its own five-year average P/E ratio is 10.4.
Still, we are currently below that already-low level.
The P/CF ratio of 4.4, which is also very low, is also lower than its own five-year average of 4.8.
Sure, Verizon isn’t growing quickly, but the low multiples are lower than they usually are and price in low expectations.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
In order to estimate the intrinsic value of the business, I used a dividend discount model analysis.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
I factored in a 10% discount rate and a long-term dividend growth rate of 3%.
This growth rate is roughly in line with (albeit slightly higher than) Verizon’s demonstrated dividend growth over the last many years.
With the forecasts for near-term annual EPS growth coming in at somewhere between 2% (from Verizon) and 4% (from CFRA), I’m basically splitting the difference and coming in straight down the middle here.
I think Verizon can continue to make good on the low-single-digit dividend growth it’s been reliably providing, and that’s what I’m modeling.
When the starting yield is this high, it wouldn’t be appropriate to expect a lot of growth.
However, if that big yield is being protected against inflation by some modest growth, I’d call that a win.
The DDM analysis gives me a fair value of $40.02, which would indicate the stock is possibly fairly valued.
Bottom Line
Bottom line: Verizon Communications Inc. (VZ) is one of the largest telecommunications businesses in the world, providing millions of people with the digital services they demand and are willing to pay for. Its services are very “sticky”. It’s impossible to imagine a world in which consumers en masse will suddenly stop demanding the plans (which Verizon sells) required to make use of smartphones and other devices. And new verticals, such as FWA, give shareholders something to be excited about. Although the company isn’t growing terribly fast, it’s an oligopolistic enterprise showering its shareholders with generous dividends that amount to a 6.8% yield on the stock. If one can build a portfolio full of stocks offering such fat dividends, they can make life a lot easier by more quickly unlocking financial independence and the ability to live purely off of passive dividend income. Plus, with the stock looking fairly valued, it doesn’t appear that one is overpaying for these shares at this time. For income-seeking investors, Verizon is basically a layup here.