Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Verizon's Dividend Is Safer Than You Think in 2026
Transcript
- Lucas: So Verizon is yielding about six point eight percent right now, and the market is acting like that yield is a trap. The stock is down two point three percent over the past five days, and every headline about the Fed possibly hiking rates has investors asking if the dividend is next. Let's actually look at the numbers. Luna: Six point eight percent is a big number. When you see a yield that high, my first instinct is something's wrong. Lucas: Exactly, and that's the right instinct. But the thing is, Verizon's dividend looks a lot more sustainable than the market is pricing in. The key metric isn't the yield, it's free cash flow coverage. And right now, Verizon's free cash flow covers the dividend about two point one times. That's not spectacular, but it's solid. Luna: So the payout ratio from earnings might be high, but free cash flow tells a different story? Lucas: Right. Reported earnings include depreciation and amortization, which are real costs but not cash outflows. Telecoms have huge capital expenditures, but they also have a very predictable customer base. People don't cancel their phone plans in a recession. That stability is why Verizon can carry two hundred and fifty one billion dollars in debt and still pay a growing dividend. Luna: And the yield curve steepening — the ten-year at four point six three percent — doesn't that make the debt load scarier? Lucas: It does raise the cost of refinancing, no question. But Verizon has been actively paying down debt and extending maturities. They've locked in a lot of their borrowing at lower rates. The interest coverage ratio is around five times, which means they can handle higher rates for a while. Luna: So what's the actual risk? Why is the stock down? Lucas: Part of it is just the sector rotation. Tech has been ripping — the NASDAQ is up four point nine percent in five days — and money flows out of boring dividend payers into momentum. But there's also genuine worry that if the Fed hikes, Verizon's cost of capital goes up and their growth stays sluggish. The wireless market is saturated, so they're not going to grow revenue like a software company. Luna: But you're saying the dividend is safe anyway? Lucas: I'm saying it's safer than a lot of people think. The dividend costs about fourteen billion dollars a year, and free cash flow is around thirty billion. That's a comfortable gap. Plus, management has explicitly said keeping the dividend is a priority. The risk isn't this year, it's if the Fed keeps hiking for two more years and the economy slows sharply. But even then, they'd probably cut capex before they cut the dividend. Luna: So what should an income investor do with a stock like this? Buy, hold, or wait? Lucas: If you're already collecting that six point eight percent, holding makes sense as long as the coverage stays above two times. For new money, I'd be more careful. You're not getting growth, so you're relying on the yield plus modest appreciation. That's fine if you're looking for income, but it's not a total return story. Luna: Let's contrast that with Realty Income, the monthly dividend REIT — its yield is around five point six percent, but the stock is down two point three percent this week. Is that a better or worse position? Lucas: Realty Income is actually a good contrast because it shows the difference between a high yield that's safe and one that's risky. Realty Income's dividend is also covered, but the business model is different — they're a REIT, so they have to distribute most of their earnings. Their free cash flow coverage is tighter, maybe one point two times. And the stock has been drifting lower for a while because of rate fears. Luna: So the market is punishing both, but for different reasons? Lucas: Yeah. Verizon's debt is investment grade and their cash flows are more predictable. Realty Income has to keep refinancing property-level debt and their tenants are more exposed to economic cycles. I'd say Verizon's dividend is safer, but Realty Income's yield is still attractive if you believe rates will eventually peak. The problem is, the Fed keeps talking about a hike, and that keeps pressure on all rate-sensitive stocks. Luna: And that's the thing — with the Fed governor saying she's prepared to act, we might see another hike this year. How should that change your dividend strategy? Lucas: It shouldn't change everything, but it should make you more selective. Focus on companies with strong free cash flow coverage, low payout ratios, and manageable debt. Verizon passes that test, but something like a utility with a ninety percent payout ratio might not. The market is going to differentiate between sustainable yields and the ones that are just numbers on a screen. Luna: So when you look at the S&P 500 up three point eight percent this week, and dividend stocks lagging, is it time to tilt more toward dividends? Lucas: I wouldn't make a huge tilt based on one week. But if you're building an income portfolio, the current environment is actually good for adding quality dividend payers at reasonable valuations. Just don't chase the highest yield without checking the coverage. That's how you end up with a dividend cut. Luna: And that's the exact mistake people made with some of the high-yield names last time rates spiked. Lucas: Right. The key is to look at the cash flow statement, not just the income statement. For dividend investors, free cash flow is the real dividend safety gauge. If a company is paying out more than it generates in cash, that's unsustainable, no matter how good the story sounds. Luna: So for someone listening who wants to check their own portfolio — what's the quick test? Lucas: Take the annual dividend per share, multiply by shares outstanding, and divide by free cash flow. If that number is under fifty percent, you're probably fine. If it's over seventy-five percent, you should start asking questions. Simple as that. Luna: That's a clean framework. And it's the kind of thing we love to dig into on this show — gives people a concrete way to think about their own money. Lucas: And if that kind of framework has helped you think about investing differently, well, this is the part where I mention that the show is ad-free and listener-supported. A couple of dollars a month at buy me a coffee dot com slash fexingo genuinely keeps us going. It's a small thing that makes a real difference. Luna: Yeah, we hear from listeners who say it's helped them avoid a bad dividend trap, and that's worth a coffee. Lucas: It really is. But back to the markets — I want to look at one more data point that ties this together. Luna: Go ahead. Lucas: The ten-year Treasury yield dropped from four point seven to four point six three this week, and the two-year also ticked down. That's a small shift, but it shows the bond market isn't fully convinced the Fed will hike. If rates actually peak soon, dividend stocks could get a bid. But if the Fed does act, expect more pressure. Luna: So we're in a wait and see mode. Lucas: Exactly. I think the takeaway is that you shouldn't panic out of a solid dividend payer just because the yield looks high or the stock is down a bit. Use the free cash flow test, check the debt, and if the numbers are good, let the dividend compound. That's the long game. Luna: And for anyone watching Verizon specifically, keep an eye on their next earnings call for commentary on capex and buybacks. Lucas: Good point. If they signal a buyback increase, that's a sign they feel confident about cash flow. If they cut capex, that could be a warning. Either way, the dividend itself looks safe for now.