Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How VZ Dividend Survives a Steepening Curve
Transcript
- Lucas: So Verizon is up two and a half percent over the past five days, and if you look at the yield curve, the ten-year Treasury is sitting at four point six eight percent, down just a touch from four seventy. That spread between the ten and the two is at forty-eight basis points, and it's been flattening out. That's the kind of environment where income investors start asking whether a stock like Verizon can keep paying its dividend. Luna: Verizon's yield is somewhere around six and a half percent, right? That's a big premium to the ten-year. But you've been saying that high yield can be a warning sign. Lucas: Exactly. And that's why I want to dig into what's underneath that yield. Because when a stock yields six and a half percent, the market is pricing in some risk. But with Verizon, the story is about free cash flow and debt maturities, not just the headline number. Luna: So let's talk about the balance sheet. I've seen that Verizon has a lot of debt from the C-Band spectrum purchases a few years back. Lucas: Right, they took on a ton of debt to build out 5G. And that's been the bear case for a while. But the key is that their free cash flow has been covering the dividend and then some. In the latest quarter, they generated around four and a half billion in free cash flow, and the dividend costs about two and a half billion. So there's a real cushion. Luna: That's a coverage ratio of almost two times. That's pretty solid. Lucas: It is. But the other thing to look at is the timing of their debt maturities. They've been actively paying down and refinancing, and they don't have any major maturities until 2027. That gives them breathing room, especially if rates stay elevated. Luna: So what would a dividend cut actually look like? Like, what are the red flags you'd see before it happens? Lucas: Well, we talked about this a few episodes ago with that mortgage lender that slashed its dividend. The signs were there: free cash flow drying up, debt coming due, and a payout ratio that crept over a hundred percent. With Verizon, you have the opposite — the payout ratio is around fifty-five percent of earnings, and free cash flow is growing. Luna: But isn't there a risk that the dividend is just too high relative to the stock price? I mean, the yield is still above six percent. Lucas: The yield is high because the stock is down. Verizon has been out of favor because of the debt load and competition. But the dividend itself is not the problem — it's the market's perception of the risk. And that's why you have to look through the yield to the fundamentals. Luna: And you're not saying that every high-yield stock is safe, right? Like Altria is down almost five percent this week. Lucas: Altria is a different story. Their payout ratio is over eighty percent, and they're dealing with declining volumes and regulatory pressure. The yield is over eight percent, but that's not a sign of strength — it's a sign that the market expects a cut. We actually did an episode on that trap a while back. Luna: So the market is treating Verizon and Altria differently, even though both have big yields. Lucas: Right. And the five-day price action shows that. Verizon is up, Altria is down. The market is rewarding the one with better cash flow and punishing the one with more risk. It's not just about the yield — it's about the sustainability of that yield. Luna: But hold on, with the ten-year at four point six eight percent, you can get a pretty decent yield in Treasuries without any stock risk. Why would anyone take on Verizon's risk for an extra two percent? Lucas: Because you're also getting dividend growth. Verizon has raised its dividend for nearly twenty years, and even if the growth is modest — like two or three percent a year — over time that compounds. Plus, there's the potential for capital appreciation if the stock re-rates. But look, you're right, the risk premium isn't huge. That's why you have to go in with your eyes open. Luna: So if someone is looking at Verizon for income, what's the one thing they should check before buying? Lucas: I'd say the free cash flow to dividend coverage. And not just for one quarter, but over the last few years. If that number is consistently above one point five, you're probably fine. With Verizon, it's been around one point eight to two times. That's a good sign. Luna: And what about the debt maturities? How do you assess that? Lucas: You want to see that they don't have a wall of debt coming due in the next couple of years. Because if they have to refinance at higher rates, that eats into free cash flow. Verizon's next big maturity is in 2027, so they have time. But if rates stay high, they'll have to refinance at say five and a half percent instead of three percent. That's a cost, but not a dividend killer. Luna: That's a good point. And I guess that's why the stock has been resilient this week, even as the curve has flattened. Lucas: Exactly. And you see it in the broader market too. The S&P 500 is up half a percent on the week, and the Dow is actually down a bit. But dividend ETFs like SCHD and DVY are up one and a half to one and eight percent. So income investors are rotating into quality dividend payers. Luna: And that's a shift from earlier in the year, right? When tech was dominating and dividends were an afterthought. Lucas: Yeah, I think with the AI boom getting more scrutiny — Steve Eisman is calling it a bubble — investors are looking for some stability. And dividends provide that. But you have to be selective. Not all dividend stocks are created equal. Luna: Speaking of being selective, I've been thinking about how our listeners might be trying to figure this out on their own. And I know we've both spent a lot of time on these kinds of analyses. Lucas: Yeah, and honestly, the reason we can keep doing this ad-free is because of the listeners who toss a few bucks our way. It's like two dollars a month for some people, and that genuinely covers the hosting and the research tools. If you've gotten value from the show, you can support it at buy me a coffee dot com slash fexingo. It makes a real difference. Luna: And it's not about big pledges. Every little bit helps keep the lights on, so to speak. Lucas: Right. So back to Verizon — the other thing to watch is the competitive landscape. T-Mobile has been aggressive, and that's pressured Verizon's customer growth. But Verizon has been focusing on enterprise and fixed wireless, which has better margins. Luna: So you're saying the dividend is safe for now, but there are longer-term threats? Lucas: Sure, but every company has threats. The question is whether the balance sheet can absorb them. And with Verizon, the answer is yes. Their net debt to EBITDA is around two and a half times, which is manageable for a telecom. And they've been paying down debt, not adding to it. Luna: I think that's the key takeaway: a high yield isn't automatically a trap. You have to look at the cash flow, the debt, and the payout ratio. Lucas: Absolutely. And that's the framework you can apply to any dividend stock. If you see a yield that's way above the market, ask yourself: is the market pricing in a cut? And then check the fundamentals to see if that fear is justified. With Verizon, the fear is overblown. With Altria, it's not. Luna: We should probably do a full episode on that framework at some point. Lucas: We've touched on it before, but you're right, it deserves a deep dive. But for today, the takeaway is that Verizon's dividend is safe, and the stock's recent gain reflects that. If you're looking for income, it's worth a closer look. Luna: And maybe keep an eye on the ten-year, because if it keeps falling, that premium becomes even more attractive. Lucas: Exactly. That's a good way to think about it. Thanks for joining us, and we'll catch you on the next one.