Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Verizon Dividends Hold Up When Rates Move Sideways
Transcript
- Lucas: So Verizon is up nearly two percent over the past five trading days. That's not huge, but in a week where the Dow is down almost a percent and the S&P is basically flat, it stands out. Luna: And this is a stock that's been under pressure for a while. The narrative around telecom has been pretty negative — heavy capex, competitive pricing, slow growth. Lucas: Right, exactly. But the market seems to be rethinking that. The ten-year Treasury yield dropped from 4.56 to 4.54 this week — not a huge move, but it's drifting lower. And when bond yields stall or dip, high-dividend stocks become more competitive. Luna: Especially ones with a yield like Verizon's — it's around 5.8 percent right now. That's a full 126 basis points above the ten-year. Lucas: And that spread is exactly why income investors are paying attention. But there's a wrinkle. Verizon's payout ratio is high — north of 90 percent. A lot of dividend investors see that as a red flag. Luna: I'd be cautious, but I think there's a case for making an exception. If our conversations on this show have helped you think about dividend safety or portfolio construction differently, that's the whole point. We keep the show ad-free, and listener support through Buy Me a Coffee is what makes that possible. If you find value here, you can find us at buy me a coffee dot com slash fexingo. Anyway — back to Verizon. Lucas: Yeah, so that payout ratio — it's not ideal on paper. But Verizon is a regulated utility in all but name. The cash flow is predictable. Capital spending is high, but it's not discretionary — they have to maintain the network. So the dividend is less at risk than a cyclical company with the same ratio. Luna: Compare that to Altria, which we talked about in a previous episode. Altria's yield is even higher — around 8 percent — but its payout ratio is also above 90 percent, and the business faces secular decline. Cigarette volumes keep dropping. Lucas: Right. Altria is fighting against a long-term trend. Verizon is fighting against competition, yes, but demand for data isn't going anywhere. People need connectivity. So the risk profile is different. Luna: And the Fed is on hold right now. The effective fed funds rate is 3.63, and it's been flat for over a month. That removes some of the pressure that high-dividend stocks felt earlier this year when yields were climbing. Lucas: Exactly. If the ten-year had kept rising toward 5 percent, Verizon's yield advantage would have shrunk. But now that rates are steady or slightly lower, stocks like Verizon look more attractive. And the dividend ETFs reflect that — VYM is up 0.6 percent this week, SCHD up 0.5 percent. Luna: Those are modest gains, but in a market that's basically treading water, steady income with a little capital appreciation is a decent outcome. Lucas: It is. And I think the key question for dividend investors right now is whether you're being compensated for the risk. With Verizon, you're getting a 5.8 percent yield from a business that generates over $30 billion in free cash flow before capex. The dividend costs about $11 billion a year. Luna: So they cover it more than twice from operating cash flow. The payout ratio based on earnings is high because of depreciation — but cash-wise, it's fine. Lucas: That's the nuance that gets lost in simple payout ratio screens. A lot of dividend ETFs screen on payout ratio alone, which is why Verizon might not be a top holding in funds like SCHD. But for individual stock pickers, it's worth a closer look. Luna: And the yield curve is still steep — the ten-year minus two-year spread is 35 basis points. That typically favors value and income stocks over growth. Lucas: Yeah, the curve has steepened a bit from earlier this year, but it's come down from 38 basis points last week. Still positive, which is a healthy environment for dividend payers. The question is whether the curve stays steep or flattens if the Fed cuts later this year. Luna: Right now the market is pricing in maybe one cut by year-end. If that happens, shorter-term yields fall, and the two-year is already at 4.16, down from 4.21. That makes the dividend yield even more compelling on a relative basis. Lucas: But you're also locking in a yield that could look less attractive if rates drop further. That's the opportunity cost. If you buy Verizon today and the ten-year falls to 4 percent, you're sitting on a nice capital gain plus the dividend. Luna: And if rates go back up? You have a stock that might decline, but you keep collecting the dividend. As long as the business doesn't cut, you're getting paid to wait. Lucas: That's the dividend investor's edge. And Verizon has a long track record — they've paid a dividend every quarter since 1984, and they've increased it for 18 consecutive years before pausing recently. That pause is worth noting. Luna: They paused growth in 2023 after the spinoff of their media assets. But they didn't cut. And the dividend is still 5.8 percent. Lucas: Right. A pause isn't a cut. And given the capex demands for 5G and fiber, I'd rather they hold the dividend flat than stretch to raise it unsustainably. Luna: That's the disciplined move. So for someone building a dividend portfolio today, where does Verizon fit alongside something like Johnson & Johnson, which we covered in episodes 97 and 98? Lucas: They're complementary. Johnson & Johnson has a lower yield — around 3.2 percent — but much stronger dividend growth and a lower payout ratio. Verizon gives you immediate income. Johnson & Johnson gives you income that grows faster over time. A portfolio could hold both. Luna: And then there's Realty Income, which we discussed in episode 103. That's a REIT yielding about 5.5 percent, but with different tax treatment. Lucas: Right. Realty Income's dividends are taxed as ordinary income, while Verizon's are qualified dividends. That matters for after-tax yield. So you have to factor that in. Luna: So Verizon is not a no-brainer, but it's a very specific tool in the toolbox. High yield, stable cash flows, reasonable coverage on a cash basis, and a business that isn't going away. Lucas: And with rates flat, the macro tailwind is there. The biggest risk is probably a recession that pressures their consumer business, but even then, people pay their phone bills before a lot of other things. Luna: That's the defensive angle. In a downturn, telecom tends to hold up better than most sectors. Lucas: Yeah. So if you're looking for income and you're comfortable with a stock that's not going to double in a year, Verizon is worth a spot in the portfolio. Just don't expect dividend growth anytime soon. Luna: And keep an eye on the payout ratio — but use cash flow, not just earnings, to judge it. Lucas: Exactly. That's the real takeaway for today. Payout ratios matter, but context matters more. Thanks for listening.