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Last year at this time, the summer pullback began and I began writing about dividend growth stock bargains. As the summer dragged on, many retirees wondered if their portfolios would survive. At the time I was plugging Dividend Growth Stocks Perfect For Retirees, one of which was Verizon (NYSE:VZ). At the time, the yield was 5.68% for this Dividend Challenger. However, when 2012 began, Verizon began to appreciate in price. (Data from David Fish's CCC charts and Yahoo Finance)

(click to enlarge)

I consider Verizon to be a cash cow with a cyclical price chart, similar to AT&T (NYSE:T), although less cyclical than the S&P 500 Index (NYSEARCA:SPY). About every 5 years the market peaks and then crashes, with a more subdued drop by high dividend stocks like Verizon. I consider this time period to be one of bargain hunting, with my dripped dividends buying more shares than at higher index levels. With all the recent hype about the iPhone subsidies, smart phone competition, spectrum purchases with governmental delays, the price chart for VZ is beginning to look like a growth stock. Will this price appreciation produce higher dividend growth or will the stock repeat the last 5 year cyclical cycle?

In order to investigate this, I ran a dividend reinvestment spreadsheet for the past 5 years.

StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
Totals 347.24$2,863.66 84.09

As can be seen from the chart, total return, including dividend reinvestment, was $3077.10 for the initial $10k invested in April 2007, or 30.77%. This computed out to 5.5% per year, similar to the dividend yield. It should be noted that the worst recession in my lifetime occurred during this period. Will I continue to DRIP during this coming downturn? Yes, it should not be any worse than 2008, especially with the dependence on the Internet and computing coupled with mobile phones. Below I have plotted the results of the spreadsheet:

(click to enlarge)

It should also be noted that Verizon paid a special dividend in the second quarter of 2008 as it restructured its business. This distorts the yield for that extra dividend.

Conclusion: I have dripped Verizon since 1999 and enjoy the fruits of this long term investment. The stock price has held up rather well during market corrections and I think it will continue. This stock meets my 4% minimum yield point for strategic investment. Is the current P/E of 43 a concern? Yes, but the forward P/E is 16 for 2012. Earnings per share are projected at $2.50 for 2012, $2.79 for 2013 and $3.11 for 2014. The projected earnings per share growth for the next 5 years is 9.2% per year. The 5yr dividend growth rate is 3.9% per year. I am sticking with this stock for the strong yield during these days of 30 year treasury bond yields of 2.79%.

It is critical that a retiree does his or her own due diligence on any investment. I believe this to be a conservative investment and am continuing to DRIP this stock. However, as I have written in the past, diversification requires as many sectors of the S&P as one can afford -- don't put all of your eggs in one basket!

Disclosure: I am long VZ, T.

Source: Verizon: Does The Price Growth Compensate For The 4.89% Yield?