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Highest Dividend Stock on the Dow - Verizon! by Value Mole

|Includes: Verizon Communications (VZ)

We looked at the highest dividend yield stock on the Dow Jones Index.  The top yielder is Verizon (NYSE:VZ) with 6.8% dividend yield.  Second place and third place is AT&T (NYSE:T) with 6.6% and Pfizer (NYSE:PFE) with 4.9%, and the average dividend yield for the 30 stocks in the Dow is 2.8%. 

Overview:  Verizon is a large-cap telecommunications provider of fixed-line, wireless, and data services and is the #1 telecom provider in the U.S. with nearly 93mm customers as of 1Q10.  Wireless business comprises 58% of revenue and Wireline business represents 38% of revenue (as of 1Q10).  The top 4 telecom provider in the U.S. are Verizon (92.8mm customers), AT&T (87.0mm), Sprint Nextel (48.1mm) and T-Mobile (33.7mm). 

In July 2010, Frontier Communications (NYSE:FTR) completed its acquisition of Verizon’s rural telecom business in 14 states for approximately $8 billion, tripling Frontier’s customer base.  Each Verizon shareholder received 0.24 shares in Frontier stock for each stock of Verizon owned.  Verizon sold off its rural telecom business in these 14 states, partly due it its acquisition of Alltel in 2009 for $28.1 billion. 

Rumors have been circling regarding Apple ending its exclusivity with AT&T and adding Verizon Wireless as one of its service providers.  Given that JD Power and Associates latest study for period ended December 2009 ranked Verizon Wireless #1 for highest call quality, everyone can see why Apple and Verizon combination would make complete sense.  Even without Apple’s iPhone, Verizon has been delivering recently do to the phenomenal success of Google’s Android OS smart phones (ie: Motorola’s Droid and HTC).  

Valuation:  Verizon currently trades at 12.9x 2010E P/E, 5.5x 2010E TEV/EBITDA, and 2.0x Price/Book.  The Company’s annual dividend of $1.90 per share (6.8% yield) represents a 88% dividend payout ratio, which is higher than we would normally like.  However, with a corporate debt rating of A and consistent dividend growth in the past 5 years of 3.2% average increase each year ($1.62 per share from 2005 to $1.90 per share in 2010), we feel comfortable with Verizon maintaining and growing its dividend in the future. 

Summary: With a dividend yield of 6.8% (compared to U.S. Treasury yields of 2-3%), along with recent momentum with Google Android smartphone success and possible iPhone addition, we believe Verizon is worth adding to your portfolio as a dividend yield play.  Even if the stock does not appreciate, you collect a cool 6.8% annual yield, not bad compared to 1% in a savings account or 4% in a high-grade bond fund. 

Disclosure: Long position in VZ, KFT