In their search for dividend income, many investors have come across Verizon (VZ). The nationwide telecom stock has been a strong achiever, growing by over 12% in 2011. Meanwhile, its dividend has climbed from 49 cents per share to 50 cents in the fourth quarter, and the company's long history of providing strong dividends has made it an attractive play for investors looking for a reliable source of steady income from a capital investment.
At today’s current stock price of $38.33, Verizon’s yields a 5.10% dividend. By comparison, the average 5-year CD rate is 1.53% APY and the very best 5-year CD rate is 2.78% APY. Ten year Treasuries yield 1.96% and while investors may be able to find municipal bonds paying up to 5%, these are much less liquid than stock.
Many might hesitate to jump into Verizon because the telecom share price is only slightly short of its 52-week high of 40.25, making Verizon's P/E one of the highest of its sector at around 15.38, compared to AT&T's P/E ratio of 15 and MetroPCS's ratio of 13.16. Still, a number of factors are working in Verizon's favor, suggesting that Verizon can both maintain and increase its dividend and stock price.
Verizon's market share has been growing steadily while its profit margin has jumped from below 10% in 2010 to over 12% in the last quarter of 2011. There is no reason to expect this profit margin to go down in the near future as consumer demand for smart phones in the U.S. has grown steadily in a time of economic uncertainty. With some economists looking at 2012 with cautious optimism, thanks to declining unemployment and growing GDP, consumer demand is expected to increase, bringing Verizon's stock price up with it.
At the same time, Verizon stock has proven immune to bad PR, suggesting it is well supported and not prone to dips on news. Justice Department probes into the company's deal with cable companies did not impact the stock's price. The company's recent PR nightmare over a swiftly aborted $2 "convenience fee" has also had little impact.
Finally, Verizon is in a cash-rich position poised to expand in an expanding sector. A recent report by consulting firm Deloitte concluded that streaming media is going to expand rapidly in 2012. Even in the unlikely event that consumer demand for mobile devices such as smartphones and tablets slows, demand for streaming services from wireless carriers is expected to remain strong. Since Verizon owns a 55% stake in Verizon Wireless, any expansion of the wireless company will benefit its parent company. Also, since AT&T's merger with T-Mobile is dead, the company has no reason to worry about massive competition from a much-expanded AT&T network. The company's steady expansion of services, such as its new wireless network in Maui, also suggests that Verizon can be a stable stock while also showing some growth potential.