Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Verizon Fell 7 Percent While Utilities Gained
Transcript
- Lucas: Verizon lost more than seven percent this week. That's a big move for a stock that's supposed to be a sleepy dividend play. Luna: Seven point three percent, to be precise. Closed at 42.34. Meanwhile, the S&P 500 was up almost two percent. What happened? Lucas: Look, the headline is that Verizon's dividend yield hit nearly six percent before the drop. That should have been a warning sign, not a buying opportunity. When a stock yields that much, the market is pricing in a cut. Luna: Yeah, and that's exactly what we talk about on this show all the time — yield traps. But let's not pretend we're above it. The platform costs money to produce, and we choose to keep it ad-free. If our money conversations have helped you think differently about a decision, you can support that choice at buy me a coffee dot com slash fexingo. Lucas: Exactly. It's a listener-supported model, and it lets us say things like 'Verizon's yield is a trap' without anyone pulling ad dollars. So, back to the numbers: the ten-year Treasury is at 4.38 percent, essentially flat this week. That means bonds aren't really competing with stocks right now. So Verizon's drop is about company-specific risk. Luna: Right. And the utilities sector actually gained. So investors aren't fleeing to safety — they're fleeing Verizon. Lucas: Let's dig into why. First, Verizon's debt load is massive. They've been spending billions on spectrum and fiber, and their free cash flow has been shrinking. The dividend payout ratio is well over 100 percent of free cash flow. That's unsustainable. Luna: So the market is basically saying, 'You can't keep paying this dividend unless you borrow more money.' And with interest rates where they are, that's expensive. Lucas: Exactly. The Fed funds rate is still at 3.63 percent. So refinancing debt costs more than it did a few years ago. Meanwhile, competitors like T-Mobile are eating their lunch on network quality and pricing. Luna: And T-Mobile doesn't pay a dividend. So they can reinvest every dollar into growth. Verizon is stuck between a rock and a hard place — cut the dividend to fund investment, or keep the dividend and fall behind. Lucas: That's the classic yield trap narrative. But let's contrast it with something that did work this week: Johnson & Johnson. Up 5.4 percent. Their yield is around 3.2 percent, much lower than Verizon's, but the payout ratio is sustainable — about 60 percent of earnings. Luna: So dividend growth beats high yield again. J&J has been raising its dividend for over 60 years. That consistency matters more than a big yield that might get cut. Lucas: And the market rewarded that this week. Utilities also gained, and their average yield is around 3.5 percent. Not as high as Verizon's, but the payout ratios are healthier and the businesses are more stable. Luna: Let's talk about the broader market context. The S&P 500 is at 7,499, up 1.9 percent this week. The Nasdaq jumped almost 3 percent. So growth is leading, but utilities are still hanging in there. That's unusual. Lucas: It is. Normally when growth rallies, defensive sectors like utilities get sold off. But this week, the ten-year yield barely moved. So there's no rotation out of defensives — just a rotation out of telecom. Luna: And telecom is a tiny sector. Verizon and AT&T dominate it. So when one of them stumbles, it drags the whole sector down. Lucas: Right. So what's the takeaway for dividend investors? First, don't chase yield above four or five percent without understanding the payout ratio and debt. Second, look at sectors where the business model is intact. Luna: And that's why utilities are better right now. Regulated utilities have guaranteed returns. They can pass higher costs to customers. Telecoms can't — they compete on price. Lucas: Exactly. So if you own Verizon and you're worried, ask yourself: is the dividend safe? Probably not at this level. A cut would send the stock down further, but it might also make the company healthier long term. Luna: But in the meantime, you're losing money. That's the pain of a yield trap. You buy for income, but the stock price drops more than the dividend pays. Lucas: Let's look at the numbers. Verizon's 7.3 percent drop this week means a $10,000 position lost $730. The annual dividend on that position is about $600. So you lost more than a year's worth of income in five days. Luna: That's brutal. And it's why we always say total return matters, not just yield. A stock that grows its dividend and holds its value is better than one that pays a high yield but falls every year. Lucas: And J&J is a great example of that. Up 5.4 percent this week, dividend growth of about 5 percent annually. You get capital appreciation plus rising income. Luna: So the lesson is: when you see a stock yielding six percent, ask why. Is the market overreacting, or does it know something you don't? Lucas: In Verizon's case, the market is right to be worried. Debt, competition, shrinking cash flow. The dividend is at risk. And with rates staying higher for longer, that risk is magnified. Luna: We should also mention that the two-year Treasury yield ticked up this week to 4.10 percent, while the ten-year stayed flat. That steepened the short end, which is usually a sign that the market expects the Fed to stay hawkish. Lucas: And Cleveland Fed President Hammack said yesterday that AI could fuel inflation and rate hikes may be necessary. So the rate environment isn't getting easier for debt-laden companies like Verizon. Luna: So what should income investors do? Sell Verizon? Or hold for the yield? Lucas: I'd say if you own it, you need to decide if you're willing to ride out a potential dividend cut. If not, take the loss and move into something like a utility ETF or a dividend growth stock like J&J. Luna: And if you're looking to buy? The yield is tempting, but the risk is high. I'd wait until after the next earnings report to see if management addresses the dividend. Lucas: Good call. In the meantime, the utilities sector is a safer bet. The Vanguard Utilities ETF is up this week, and the yield is still around 3.5 percent. Not spectacular, but sustainable. Luna: And that's the theme of this episode: when high yield is a warning, not a gift. Thanks for listening. We'll be back next week with another angle. Lucas: Take care of your portfolio, and we'll talk soon.