“It’s hip to be square.”
– Huey Lewis and the News
It’s a funny world we live in. Investments that would have been considered the domain of widows and orphans a decade ago are now downright trendy.
I’m talking, of course, about dividend-paying stocks. During the raging bull markets of the 1980s and 1990s and the housing boom of the 2000s, investors gave little thought to the income being thrown off by their investments. When you could flip a tech stock — or a house — in a couple of months and walk away with a 50% gain, earning a couple extra dollars from dividends seemed a little petty.
Two bear markets and a housing collapse later, investors have come to appreciate the certainty of getting a regular dividend check rather than waiting — and hoping — for the market price to rise. In a volatile, uncertain world, dividends might be the only return you get. This certainly was the case for investors who held S&P 500 index funds last year. Not including the 2% dividend, their return would have been exactly zero.
Now, some of the highest yields available are in the telecom sector. In prior articles, I’ve written at length about Spanish telecom giant Telefónica (NYSE:TEF), which still is one of my favorite stocks to hold for the rest of this decade.
Today, I’m going to take a look at one of Telefónica’s European rivals, British-based Vodafone (NASDAQ:VOD), and its American partner, Verizon Communications (NYSE:VZ). The two companies jointly own Verizon Wireless, the largest mobile phone operator in the United States. (Verizon holds 55% of Verizon Wireless, and Vodafone the remaining 45%.)
I’ll start first with Verizon because the investment case is more straightforward. You buy Verizon for the dividend stream; end of story.
Verizon currently pays out $2 per share in dividends, which works out to a yield of 5%. That’s a great yield in a world where the 10-year Treasury barely yields 2%. Importantly, Verizon also has a long history of raising its dividend — the $2 dividend that investors enjoy today was just $1.50 10 years ago.
Investors should not, however, expect much in the way of capital gains. With the exception of the smartphone and tablet data plans sold by Verizon Wireless, all of the company’s businesses are mature and in more or less saturated markets. The home landline business is in terminal decline, and home Internet and video services are no longer a growth industry. Growth in business telephony is dependent on growth in business employment, which has been a little less than stellar these days.
Furthermore, Verizon is an American company with very little exposure to faster-growing emerging markets.
Verizon also is far from cheap. It trades at 14 times estimated 2013 earnings.
For all of these reasons, Verizon investors should look at their stock the same way they would look at a corporate bond — as a source of current income and nothing more.