As I've written about, most recently in Tending the Dividend Garden - March Update, I like to group my stocks into several categories that I relate to crops from my garden. I believe this is an apt analogy because investing and gardening both require similar traits like planning and patience. My groups are defined solely by a stock's dividend yield and dividend growth rate (DGR). The classic examples of my crop categories are Microsoft (NASDAQ:MSFT) for apple tree, Target (NYSE:TGT) for strawberry, Johnson & Johnson (NYSE:JNJ) for green bean, AT&T (NYSE:T) for watermelon, and Realty Income (NYSE:O) for spinach. These two metrics are by no means the only criteria I measure a stock by when performing my due diligence, but organizing my stocks based on their dividends helps to keep me balanced between the high-yielding, low-DGR stocks and the low-yielding, high-DGR stocks. In this article, I will explore the dividend of Verizon (NYSE:VZ) a bit deeper. I will also evaluate valuation in terms of the dividend. I realize because of this the article will be heavily dividend-centric, but dividends are what I know.
VZ falls into the category of watermelon in my Garden Portfolio. A watermelon vine typically produces only a few fruits, but they are massive. Similarly, watermelon stocks have DGRs below 5% but make up for that low number with yields over 4%. VZ has DGRs of 2.6% 1 year, 3.1% 3 year, 3.0% 5 year, and 3.4% 10 year. The yield currently sits at 4.74%. Within this portfolio, I also want to see companies display a commitment to increasing their dividend. In the case of VZ, the streak of increasing dividends is 12 years, which tells me a lot because it means the dividend kept climbing through the Great Recession.
I also like to analyze how DGRs compare to one another to get a sense of whether the rates are constant or experiencing recent acceleration or deceleration. For VZ, the ratio of the 5-year DGR to the 10-year DGR is 0.88, meaning the average dividend growth of the last 5 years is equal to about 88% of the 10-year average growth. As far as the 3/10 ratio, it actually climbs to 91%. I don't put too much weight into 1-year DGRs, but with the 1/10 ratio dropping to 0.76, it may be an indication of smaller raises in the future. The drop in the 1-year DGR could be a temporary blip, but the anticipated raise in October will help diagnose any emerging trends.
Like many dividend growth investors, I don't worry too much about the share price of a given stock as long as those dividends keep rolling in. However, I do pay attention to valuations when I'm investing new capital. One measure of valuation I like is the comparison between the current dividend yield and the historic yield. With a current yield of 4.74% and a 5-year average yield of 4.45%, I'm led to believe VZ is a bit below its average value. In order for the yield to come in line with its recent average, the share price would have to climb nearly 7% to just shy of $52.
Combined with any trends within DGRs, payout ratio can help determine the future dividend growth. I find this to be especially true when it's compared to the 10-year historic payout ratio. Many companies have targets where they like these ratios to be, so any departure from the goal is worth noting. VZ has a current payout ratio of 72%, while the 10-year average ratio sits at 164%. This is heavily influenced by a stretch of payouts over 100% from 2009 to 2012. For a more accurate picture, I also looked at the 4-year average payout which is 65%. Normally, I'd expect below average dividend growth to return to the lower payout ratio, but VZ has shown it has no problem exceeding 100%. The recent DGRs are probably a more accurate prognosticator than the payout ratio in this case.
In order to get a glimpse of my future dividend income, I will estimate upcoming raises based on the data in this article. I believe future raises will be in the 2% range over the next several years, so I extrapolated that to arrive at a total dividends received value of $12.04. This equates to a 5-year total payback of 24.7%. Because most people own more than a single share of VZ, I calculate how many currently held shares it would take to generate an additional share through reinvested dividends. For VZ, that comes to be just over 4 shares for a "bonus" one by the end of 2021.
VZ is one of the few watermelon stocks I hold in my Garden Portfolio. I tolerate the anemic DGR to get the huge current yield. I enjoy having the dividends automatically reinvested and have no plans to exit this position. I am hesitant to add fresh capital at this time as I'm attempting to fill out some other positions. However, I do think the duopoly of T and VZ makes for great investments in any dividend portfolio. Thanks for reading.
Disclosure: I am/we are long VZ, T, JNJ, MSFT, O, TGT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.