Passive income is a beautiful thing. You can live off it, let it pay your bills, or reinvest it to increase your income stream over time. But knowing you’ll get paid is the key to stress-free dividend investing, however you use it.
Telecom giant Verizon Communications (NYSE:VZ) is arguably top of the list when it comes to reliable dividends with fat and juicy returns. This stock pays a dividend yield of 4.8% that you can rest easy knowing the check will keep coming in every quarter. Let’s take a closer look at why you can be sure of Verizon’s payout and what could propel the title further into 2022.
Verizon is part of the tiny telecom club in the United States
The telecommunications industry is worth about $1.7 trillion worldwide, and about a third of that market is in the United States, or about $583 billion. But only a small handful of companies control this big money industry in the United States. Verizon is part of the US telecommunications oligopoly, which means it’s an industry with limited competition.
This small group is made up of Verizon, AT&T (NYSE:T), and T-Mobile, which together control approximately 99% of the US market. Why don’t competitors emerge to challenge them? These three companies spend billions of dollars each year to build and maintain their networks and have done so for decades. For example, Verizon spent approximately $18 billion in 2021. These investments include spectrum licensing, cell tower expansion, fiber optic cable installation, vehicle fleets, and satellites.
A competitor would have to invest several billion dollars to build the infrastructure necessary to offer similar service and network coverage, simply in the hope that it could displace one of these incumbents. It just doesn’t make much sense to try, which is why no one does.
Rock-solid finance supports payment
So why is Verizon’s dividend so reliable? Consider the household services that come through your smartphone these days. About 84% of US households own a smartphone, which they use to pay bills, conduct business transactions, play games, social media, or contact friends and family. It is a tool that people use constantly, which makes it very important. Many people consider their telephone service to be as vital as the grocery store or their residence.
Watch how Verizon’s net income (its net profit) continues to climb regardless of the unemployment rate. In other words, people pay their phone bills.
But let’s say Verizon’s business faces an extraordinary adverse economic scenario, where it sees its profits drop dramatically. Verizon’s dividend payout ratio is just 47%, meaning its earnings could be cut in half before the company struggles to afford to pay its dividend. With so much room in its payout ratio and its customers paying regardless of how the economy plays out, investors should be happy with Verizon’s ability to pay its dividend.
5G brings long-term benefit at cheap valuation
Verizon is not a very fast growing company; its revenues have grown by an average of just under 2% over the past decade. But 5G continues to expand across the country, and some exciting possibilities could create opportunities for growth. For example, 5G networks could be up to 10 times faster in real-world applications than previous generation 4G. This speed could unlock many uses in new technologies that are just beginning to blossom.
Over the next decade, we could see things like autonomous driving, the growth of streaming, smart devices in industrial settings, and the Internet of Things (IoT) creating demand for more connectivity. And Verizon’s network is one of the important pieces of infrastructure that all of this could run on.
Verizon’s business is mostly in consumer devices right now, like phones, tablets and watches, but long-term investors will want to look for these potential opportunities to materialize.
Meanwhile, the stock is trading around $53 per share, creating a price-to-earnings (P/E) ratio of just under 11 using analysts’ earnings per share estimates for the whole of 2021. The stock’s long-term average P/E ratio is between 14 and 15, so stocks are attractively valued at the moment, especially in view of what 5G networks could do for growth. Meanwhile, Verizon’s 4.8% return is one you can pocket and sleep like a baby.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.