Looking for Safe & Growing Dividends? Read This
One of the main reasons why investors like reliable dividend growth stocks is that you can predict—with reasonable accuracy—when the next payout increase could be. For instance, if a company has been announcing dividend hikes every January, then there is a good chance that investors will get another “pay raise” at the beginning of next year.
Of course, in this day and age, every investing strategy should come with a warning that says “past performance is no guarantee of future results.” Due to the impact from COVID-19, a lot of companies are facing an unprecedented operating environment. And with massive declines in sales and profits, some companies have no choice but to cut their dividends.
Still, even in this challenging time, there are companies with the ability to continue their dividend growth track record.
Take a look at Verizon Communications Inc. (NYSE:VZ), for instance.
In the past, the company usually announced increases to its cash dividend at the beginning of September; this year, it is continuing that pattern.
On September 3, 2020, Verizon’s board of directors declared a quarterly cash dividend of $0.6275 per share, representing a two-percent increase from the previous payment of $0.6150 per share. The new dividend will be paid on November 2, 2020 to shareholders of record as of October 9. (Source: “Verizon increases dividend for 14th consecutive year,” Verizon Communications Inc., September 3, 2020.)
That marked the 14th consecutive annual dividend increase for VZ stock.
And keep in mind that even though Verizon Communications Inc. was created in 2000 after the merger between Bell Atlantic Corp and GTE Corp, its dividend-paying track record stretches much further back. If you include Verizon stock’s history when it was trading as Bell Atlantic, you’d see that the company has been paying steady or increasing dividends for more than 30 years. (Source: “Dividend History,” Verizon Communications Inc., last accessed September 9, 2020.)
But this shouldn’t come as a surprise. The telecommunications industry is known for having high barriers to entry. With a limited number of companies serving the market, each company gets to earn oversized profits. The business is quite durable, too. Think about it, when the economy enters a downturn and people’s income drops, they might hold off on buying new cars. However, cell phone bills and Internet bills are likely the last ones consumers skip.
And that’s why Verizon can return an increasing amount of cash to investors through thick and thin.
Of course, I’m not saying that the business is totally immune to the pandemic.
In the second quarter of 2020, Verizon generated $30.4 billion in revenue, which represented a 5.1% decrease year-over-year. The company said that the lower top-line number was mainly the result of “significant declines in wireless equipment revenue in the Consumer and Business segments, primarily due to limited in-store engagement and the impact of COVID-19 on customer behavior.” (Source: “Strong wireless customer additions and cash flow highlight Verizon’s 2Q and first-half 2020 results,” Verizon Communications Inc., July 24, 2020.)
Excluding special items, Verizon’s adjusted earnings came in at $1.18 per share for the second quarter of 2020. Again, this was lower than the $1.23 per share it earned in the year-ago period.
However, those numbers were actually better than what Wall Street was expecting. On average, analysts were projecting earnings of $1.15 per share on $29.9 billion in revenue.
Also, the company’s adjusted profit of $1.18 per share covered its $0.6150 quarterly dividend payment nearly twice over.
It’s a similar story when you take a look at the cash flow. In the first half of 2020, Verizon generated $13.7 billion in free cash flow—which is calculated by subtracting capital expenditures from operating cash flow. Its dividend payments, on the other hand, totaled just $5.1 billion during this period. (Source: “2Q 2020 Earnings,” Verizon Communications Inc., July 24, 2020.)
In other words, whether you use profits or free cash flow to evaluate dividend safety, Verizon has maintained a very conservative payout ratio. This not only leaves a margin of safety, but it also gives management plenty of room for future dividend increases.
The best part is that, at Verizon Wireless—the company’s biggest segment—the customer base is still growing. In the second quarter of 2020, Verizon Wireless had 352,000 retail postpaid net additions. And even though the economy was deep in the doldrums, very few people canceled their subscriptions as Verizon’s retail postpaid phone churn dropped to 0.58%, nearing its historical low.
And that’s not all. Going forward, 5G could become a major catalyst for Verizon stock. The company’s “5G Ultra Wideband” network is already available in 35 cities in the U.S., and is expected to be in more than 60 cities by the end of this year.
Bottom Line on Verizon Communications Inc.
Trading at $60.46 per share, VZ stock offers an annual dividend yield of 4.2%, which is quite impressive in today’s market. In fact, Verizon is currently the fifth highest yielding stock among the 30 components of the Dow Jones Industrial Average.
Usually, investors have to choose between current yield and dividend growth. But in the case of Verizon Communications Inc., the current yield is attractive, and the company should have no problem continuing to grow its payout.