We recently published a list of 10 Stocks That Are Close To Becoming Dividend Aristocrats. In this article, we are going to take a look at where Verizon Communications Inc. (NYSE:VZ) stands against the other stocks that are close to becoming dividend aristocrats.
Income investors are drawn to Dividend Aristocrats because these stocks have consistently increased their dividends for decades. However, it’s possible to achieve even better returns by investing in stocks that are on the path to becoming Aristocrats—those that are increasing payouts but haven’t yet reached the 25-year mark required to qualify. This is where the real potential for wealth lies. The downside of some Aristocrats is that their most rewarding growth years may be behind them. Once a company reaches a certain level of dividend stability, its payout ratios can become inflated, and dividend hikes may slow, often limited to modest profit growth.
That said, dividend aristocrats are special. Among the approximately 6,000 stocks listed on the NYSE and NASDAQ, only around 67 companies have earned the distinction of being Dividend Aristocrats. These stocks have consistently outperformed other asset classes over time. Since the inception of the Dividend Aristocrats Index in 2005 through September 2023, it has delivered a total return of 10.35%, outperforming the broader market, which returned 9.54% during the same period.
READ ALSO: Dividend Aristocrats: Top 7 Companies by Yield for November 2024
In recent years, dividend investing has become an increasingly popular strategy, largely due to periods of heightened market volatility. The annual dividend payouts from the broader market have been on the rise, growing from $420 billion in 2017 to $522 billion in 2021. By 2023, these payments reached a record high of $588.2 billion. This trend demonstrates that investing in dividend stocks offers the potential for long-term growth and income generation. In addition, dividends have played a key role in overall market returns. From 2013 to 2022, dividends contributed around 17% of the total return of the broader market, according to a Morgan Stanley report.
While growth tech stocks have been in the spotlight this year, dividend stocks still have the potential to outperform as companies keep raising their payouts. Analysts remain optimistic about the continued growth of dividend stocks. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, made the following comment in this regard:
“Given the FOMC’s interest rate reduction start and record earnings for Q2, and projected record earnings for both Q3 and Q4, companies may be more at ease to commit funds to larger dividend increases. The notable conclusion is that many companies have the ability and cash-flow to increase their dividend payments, but remain concerned over the economy, government spending and taxing policy.”
Analysts support dividend stocks due to their long-term growth potential. When discussing dividend stocks from this aspect, reinvesting dividends is a key strategy for compounding returns over time. From 1978 to 2020, dividends and their reinvestment contributed to 69% of the market’s total returns. This means that a $10,000 investment, with dividends reinvested consistently, would have grown to more than $1.2 million during this period. Given investors’ preference for dividend stocks, many companies have implemented dividend policies and are consistently increasing their payouts with the goal of achieving 25 years of dividend growth.
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Our Methodology
For this list, we selected companies from the S&P 500 that have raised their dividends for 18 years or more and are on the steady path to becoming dividend aristocrats. These companies would be achieving their dividend aristocrat status in seven years or less. The stocks are ranked in ascending order of their consecutive years of dividend growth. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Verizon Communications Inc. (NYSE:VZ)
Consecutive Years of Dividend Growth: 18 Years
Verizon Communications Inc. (NYSE:VZ) is an American telecommunications company, based in New York. The company offers services in communications, technology, information, and entertainment. The company’s interest in acquiring Frontier aligns with its strategy to gain a stronger foothold in the growing fiber-optic internet market. The rising demand for high-speed internet, driven by data-heavy activities like video conferencing and streaming, underscores this move. One major advantage of the acquisition would be the expansion of Verizon’s fiber network. Frontier currently offers fiber-optic services across 25 states, which would increase Verizon’s coverage to 31 states. Investors have also responded positively to this deal as VZ has surged by over 14% in 2024 so far.
Third Point Management also highlighted the company’s acquisition in its Q3 2024 investor letter. Here is what the firm said:
“While some economic activity has been showing signs of slowing, the defensive composition of the current high yield market with a high mix of higher quality credit and short duration has let the rates tailwind overwhelm such concerns. The lowest quality sectors of the market have performed best, fueled by both soft/no landing expectations, as well as two positive events in the beleaguered telecom space. Telecom/cable have been poor performers year to date due to overhang from the growth of FWA (aka “wireless cable”) and increased fiber building, however the sector re-rated materially on two deals. Second, Verizon Communications Inc. (NYSE:VZ) announced a deal to acquire Frontier Communications (FYBR), a transaction which the fund benefited from by virtue of its investment in FYBR debt. This transaction, aimed at increasing’s VZ fiber footprint, has led to broad revaluation of fiber retail networks that we think is appropriate. While we continue to expect to see FWA rapidly erode non-upgraded cable and especially copper’s share of the low-end broadband market, the VZ deal underscores the value of the higher end footprint.”
Verizon Communications Inc. (NYSE:VZ) is a strong dividend payer, having raised its payouts for 18 years in a row. Year-to-date, the company generated $26.5 billion in operating cash flow and its free cash flow for the period came in at 14.5 billion. Currently, it pays a quarterly dividend of $0.6775 per share for an attractive dividend yield of 6.11%, as of December 2.
At the end of Q3 2024, 57 hedge funds in Insider Monkey’s database owned stakes in Verizon Communications Inc. (NYSE:VZ), compared with 67 in the previous quarter. The collective value of these stakes is over $3.2 billion. Rajiv Jain’s GQG Partners owned the largest stake in the company, worth over $1.1 billion.
Overall, VZ ranks 9th on our list of the stocks that are close to becoming dividend aristocrats. While we acknowledge the potential for VZ to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than VZ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.