Having been a Verizon (NYSE: VZ) wireless customer for as far back as I can recall, my loyalty to the telecom behemoth was a significant factor behind my decision to invest in its stock.
Although I’ve recently made the switch in my wireless service provider to rival AT&T (NYSE: T), I remain steadfast in my commitment to holding onto my Verizon stock. Despite the change in my personal telecom preferences, I continue to view Verizon as the superior dividend stock. That’s precisely why I recently increased my position in the company.
A better income stream
Verizon and AT&T currently boast appealing dividend yields, with Verizon yielding 6.7% and AT&T offering a slightly lower 6.5%. However, it’s not merely the yield that sets Verizon apart from its competitor; it’s the company’s superior financial flexibility that gives it the edge.
Verizon has consistently demonstrated its ability to enhance its dividend over time. In fact, the company raised its dividend by approximately 2% most recently in September, marking its 17th consecutive year of dividend growth—a feat unmatched in the U.S. telecom sector.
On the contrary, AT&T has seen its dividend trajectory take a downward turn. Following the spinoff of its media division, WarnerMedia, and its subsequent merger with Discovery to form Warner Bros. Discovery, AT&T slashed its dividend in half at the beginning of 2022. This adjustment was necessary to align the dividend with the company’s lower post-spin earnings and to allocate more cash towards debt reduction.
Debt remains a pressing concern for AT&T. Although the company managed to reduce its leverage ratio from 3.2 to 3.0 last year, it still significantly surpasses Verizon’s level. Verizon closed 2023 with a leverage ratio of 2.6, down from 2.7 in 2022. Furthermore, Verizon utilized its robust and expanding post-dividend free cash flow to bolster its balance sheet. As a result, Verizon enjoys a higher credit rating (A-/BBB+/Baa1) compared to AT&T (BBB+/BBB/Baa2).
In essence, while both companies offer attractive dividend yields, Verizon’s consistent dividend growth and stronger financial position make it a more compelling choice for investors seeking stability and income.
Further along
Verizon and AT&T have similar capital allocation priorities. They’re investing heavily to enhance their 5G and broadband networks while paying dividends and strengthening their balance sheets. However, Verizon is further along in its deleveraging, which puts it closer to its goal of eventually returning even more cash to investors. The company expects its capital spending to be in a range of $17 billion to $17.5 billion this year. That’s down from $18.3 billion in 2023 and $23.1 billion in 2022. And it’s allowing the company to produce more free cash flow to pay a growing dividend and strengthen its balance sheet.
The company’s long-term target is to get its leverage ratio down to a range of 1.75 to 2.0. However, it plans to start returning more cash to investors beyond its growing dividend by resuming share repurchases once leverage dips below 2.25. With capital spending coming down and free cash flow rising, Verizon is getting closer to that inflection point.
AT&T is also making progress toward strengthening its balance sheet. Capital spending should decline to a range of $21 billion to $22 billion this year, down from $23.4 billion in 2023. That should enable the company to produce more free cash — $17 billion to $18 billion in 2024, up from $16.8 billion last year. While that will give it more cash to reduce debt, AT&T has a lot further to go until it reaches Verizon’s lower leverage level. It probably won’t be in the position to start increasing its dividend anytime soon.
Verizon is the better option for income investors
From a customer’s standpoint, AT&T is a better option for me. However, from an investor’s point of view, Verizon stands out as the better company. It offers a higher-yielding dividend that should continue growing. It also has a stronger balance sheet. The company should supply me with a sustainable and steadily rising income stream, which is something I probably wouldn’t get anytime soon if I swapped its stock for AT&T.
