At a time when global economies are grappling with falling GDP numbers and high unemployment rates it makes sense to create multiple income streams to improve financial stability. One way to generate a passive income stream is to invest in dividend stocks. A company distributes its dividend from its profits which suggests it needs to generate enough cash flows to sustain payouts, make regular interest payments, and reinvest in capital expenditures.
Further, dividend-paying stocks also provide investors an opportunity to benefit from long-term capital gains. With interest rates near record lows, dividend stocks offering a generous yield will also provide investors a hedge against inflation.
Keeping these factors in mind, let’s take a look to see which between Verizon (NYSE: VZ) and AT&T (NYSE: T) is a better dividend-paying stock.
Verizon has a forward yield of 4.5%
Verizon is one of the largest telecom companies in the world and is valued at a market cap of $232 billion. The telecom sector is fairly recession-proof allowing Verizon and AT&T to generate predictable cash flows across business cycles. Verizon is also part of Warren Buffett’s Berkshire Hathaway making it all the more attractive right now.
Verizon is Berkshire’s sixth-largest holding and the latter has a stake worth $9.2 billion in the telecom heavyweight that remains well-positioned to increase shareholder returns driven by enhancing technological advances and the upcoming 5G transition.
The shift towards 5G will require massive investments but Verizon enjoys pricing power despite competition from peer telecom providers. The company continues to benefit from steady cash flows driven by its monthly subscription charges, allowing it to grow dividends over time.
Verizon stock has a forward yield of 4.5% and it trades at 11x 2021 earnings which is extremely cheap if you consider its earnings are forecast to rise by 4.3% this year.
The company’s free cash flow stood at $23.6 billion in 2020 and rose by an impressive 32% year over year. Given Verizon’s dividend per share of $2.51 and its outstanding share count of 4.14 billion, the total dividend payment will amount to less than $11 billion. Verizon can also use a part of its cash flows to strengthen its balance sheet and reduce its debt balance that stood at $181 billion at the end of Q1.
In short, Verizon is a combination of stable growth and dividend that is trading at a cheap valuation.
AT&T has a forward yield of 7.26%
Another dividend-paying telecom giant is AT&T which is valued at a market cap of $207.63 billion and provides a tasty yield of 7.3%. It recently announced a deal to merge WarnerMedia with Discovery. AT&T acquired DIRECTV for $49 billion seven years back and Time Warner for $85 billion in 2018. These acquisitions increased the amount of debt in its books and AT&T ended Q1 of 2021 with a debt balance of $210 billion.
However, its acquisition of DIRECTV was nothing short of a disaster as the accelerated shift towards online streaming meant AT&T consistently lost subscribers over the years. AT&T finally sold a minority stake in the business at a significant discount.
Now, AT&T will own 71% of WarnerMedia as well as all of the latter’s debt while receiving $43 billion in the form of cash and debt securities. However, AT&T announced a dividend cut and plans to reduce its payout from $15 billion currently to between $8 billion and $9 billion going forward.
The verdict
While AT&T currently has an attractive yield, its dividend cut has not impressed investors. Looking at the two companies, VZ stock seems a solid dividend stock for income investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
