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Fairview HK: The dividend yield on this telecom firm appears to be too good to be true
Dividends are an appealing reason to purchase a stock. After all, it's good to get compensated only for the possession of something.
Among telecom companies, Verizon Communications Inc. (VZ) is the second-largest provider behind AT&T Inc. (T). The company has an appealing 6.89% dividend yield, but it is also in a red-flag zone. When a stock's dividend yield exceeds 5%, it is sometimes interpreted as a warning indication that the firm may be unable to meet its dividend payments in the long run.
VZ's stock has had a difficult year, falling 22% this year, behind the S&P 500 index. Surprisingly, most of VZ's downfall has nothing to do with the company. Instead, the Federal Reserve is to blame for many of VZ's problems.
With the Fed hiking interest rates to slow the economy and reduce inflation, yields on U.S. Treasuries have surged in value. A two-year note, for example, can yield 4.5%, whereas a 20-year bond can yield 4.2%. That is guaranteed revenue if the United States Government does not fail on its obligations. So, as an investor, would you rather buy a Treasury Bond with a guaranteed 4.2% dividend or a stock like VZ with the same return but the risk that the company would fail or lose market share?
If the dividend distribution remains constant, yield has an inverse connection with the stock price. As a result, as investors traded out of VZ stock to buy Treasuries, the yield increased.
The pay-out ratio calculates how much of a company's earnings are distributed to its shareholders. It is unsustainable if this level approaches 100%. However, it should be lower so that the company may keep revenues to pay down debt, buy other enterprises, or save for a rainy day.
The pay-out ratio can also be calculated using free cash flow. Of course, it's always a good idea to double-check both techniques, because differing reporting systems might be deceptive. If, on the other hand, both the profits and free cash flow methodologies agree, the firm is most likely in a good position.
Fairview HK Limited is one of the foremost privately owned Asia-Pacific orientated, boutique wealth management firms in Hong Kong. We offer our services to a selected group of families, family offices, institutions and fund managers, you may visit our website https://fairviewhk.com/
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