One of the reasons investing for passive income through dividends is so appealing is that it provides realised profits. Unlike share price movements, where money isn’t earned until shares are sold, dividends provide real income while I still get to hold the company in my portfolio. The trick is choosing the right income investments to own.
I’m not necessarily looking for massive price growth from my dividend investments. Instead, I’m looking to buy at a reasonable valuation and for increasing dividend payments. If I can find these two elements and the company’s operations are competitive, there’s a good chance I’ll be earning well.
Verizon is a top dividend choice
When I first started researching Verizon (NYSE:VZ), I was impressed by its yield of 6.7%. The company has even managed to increase its dividend by 2% every year on average from 2018 to 2023. It’s likely the company will make a similar increase this year. After all, the company has made no dividend reductions since 2000.
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Most people have likely heard of Verizon. It’s the largest US wireless carrier, catering to around 114m phone customers. Its major rival is AT&T, which offers an even higher yield of 6.9% right now. However, AT&T has stopped increasing its dividends. So, I think I might be getting a better deal with an investment in Verizon. That’s primarily because it provides one of the key factors I look for that I mentioned above: dividend growth.
My second key factor was buying at a reasonable valuation. Verizon offers a forward price-to-earnings ratio, which takes into account future earnings estimates, of just 8.6. And because the price is down over 35% from its all-time high, I feel much more comfortable buying the shares now than if it were trading at its peak.
I expect the price to fluctuate, and it might not necessarily even trend upward. That’s fine by me. I wouldn’t be investing for the price; I’d be investing for the dividends. At the very least, I want the shares to fluctuate around the cost I initially paid. After being around for so long, I can’t expect Verizon to grow like a new artificial intelligence company could. Those new tech companies mostly don’t pay good dividends, either.
Dividend investing comes with risks
There are a few sectors of the stock market that are particularly good for income investing. These include utilities, telecommunications, and consumer staples. That means that if I invest with a heavily dividend-oriented strategy, I might become overexposed to a certain set of industries. In turn, I run the risk of being poorly diversified, and any downturn in those sectors could ruin my overall returns.
Additionally, telecommunications companies often carry a lot of debt. This is primarily due to the heavy costs of operations and the need for many strategic acquisitions. That means Verizon is more vulnerable in the case of a major economic recession. I have to remember that in a major crisis it wouldn’t be unwarranted for the firm to decide to periodically reduce or entirely remove its dividend.
Making my call
I consider Verizon an exceptionally strong investment. So, as I’m looking at building out the income side of my portfolio right now, it’s on my watchlist to potentially invest in over the coming year.
