In “Hungry For Value Stocks? Check Out These Eight ‘Dogs Of The Dow’,” I explained that the common approach of picking the top dividend-yielding stocks was overly simplistic and potentially misleading. A good example is Verizon, a perennial high yielder – and underperformer.
The following graphs show the problem: Consistent, outsized yields that indicate, not opportunity, but consistent, undersized growth.
Graph #1 – Cumulative total return (including dividends) that lags
Graph #2 – A common 4+% dividend yield based on long-term outlook, not a temporary negative issue or investor apathy
Graph #3 – The annual price performance is unremarkable
Graph #4 – The annual total returns (price and dividend returns) that create long-term mediocrity
Why the long-term underperformance?
There are various hypotheses, but the root cause is likely Verizon’s foundation – the 2000 merger of two long-time telephone companies: Bell Atlantic and GTE. Verizon’s history review begins with this:
“Verizon Communications was created on June 30, 2000 by Bell Atlantic Corp. and GTE Corp., in one of the largest mergers in U.S. business history. GTE and Bell Atlantic evolved and grew through decades of mergers, acquisitions and divestitures.
“Today, Verizon is a global communications technology company delivering the promise of the digital world to millions of customers every day.”
The challenge is those millions of customers have differing needs. Gone are the days of AT&T wiring a community and supplying a phone. Besides the various alternatives now available, served by a variety of competitors, the technological advances shorten the lifecycles of those alternatives (and their financial payoffs).
Wires, better wires, cables, optical wires, cell towers, satellites – 3G, 4G, LTE, and now 5G that requires a completely new and more extensive antenna network.
Look at the financial challenge for Verizon this way: Everyone grouses about their cable and phone bills, while they willingly lay out the dough for the latest phones, tablets, TVs and streaming plans. Those new antennas, etc.? They are like roads and bridges – expected and generally ignored unless they are unavailable or broken.
Then there are the technological advances to come. Following all the 5G antenna installation, something else is going to come along.
The bottom line
Verizon is a good example of how simplistic strategies that sound good can be misleading and unrewarding. High dividend yield? It can be an indicator of a temporary underperformance. However, it can also be a sign that the earnings payout is too high and/or the long-term growth prospects are too low.