Dividend investments come in all varieties and can be an investing form suited for younger and older investors. But not all dividend stocks are suitable for those demographics. I believe one dividend stock that isn’t for everyone is Verizon (VZ 0.25%).
With Verizon’s 7.4% dividend yield, many investors are highly attracted to it, as it is one of the highest yields on the market that isn’t in an obviously bad situation.But does that mean everyone should buy it? Let’s find out.
Verizon’s dividend looks to be relatively safe
Verizon is one of the primary phone carriers in the U.S., but it also offers other services like broadband internet. These offerings are fairly commoditized now, so any growth Verizon experiences isn’t meaningful. Unfortunately, Verizon wasn’t growing at all in the third quarter, as its total revenue declined by 2.6%, with earnings per share decreasing by 7.6%.
This is one of the red flags I think all investors should consider: Verizon is a shrinking business. But is it close to needing to cut its dividend?
There are two primary ways to assess how safe a dividend is using dividend yield: Earnings and free cash flow. Earnings are easier to calculate, but free cash flow gives a more accurate picture of the company’s cash-generating state.
On the earnings side of the analysis, Verizon generated $1.13 per share in Q3 and $4.96 over the past year, more than enough to offset the $0.665 quarterly and $2.66 annual dividend.From a free cash flow (FCF) standpoint, Verizon is also doing just fine. It generated $5.9 billion in FCF during Q3 and $13.4 billion over the past year while paying out $2.7 billion and $10.8 billion in Q3 and the last 12 months, respectively, in dividends.
So, Verizon’s dividend is safe despite the slight decline Verizon has experienced over the past year.
But dividend yield and payout aren’t the only factors investors should consider if they want to invest in Verizon.
Verizon’s stock has been a long-term loser
Total return is also a consideration, because if a stock pays a high dividend but loses value, it’s a losing investment. That has been Verizon’s case for almost any period, as its high dividends haven’t offset a declining stock price.
Despite Verizon paying $12.61 in dividends per share over the past five years, its stock price has declined from around $60 to about $35. That’s not a winning formula, which is why I think most growth-oriented investors who are still a ways off from retirement should avoid Verizon’s stock like the plague, even if you are a dividend investor.
However, if you’re at a stage in life where dividends are essential to your cash streams, Verizon stock may make sense. As long as the company can afford its dividend payout, it will be a constant source of cash, but the underlying asset may decline, decreasing the account’s overall size. If only a segment of your account is devoted to Verizon stock, this may not matter.
Verizon’s dividend looks safe and attractive, but with its historically losing track record, most investors need to avoid this stock.
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.