Telecom Stock Alert: Don’t Fall Into This Dividend Trap

Stocks to sell

Telecom investors sometimes look for high dividend yields. However, dividends aren’t much of a consolation prize if the stock price declines. This could happen with Verizon Communications (NYSE:VZ) stock in 2023’s second half. And frankly, Verizon’s dividend payments might not even be sustainable in the long run.

We previously tried to warn people about the Verizon dividend trap.

You may have noticed that Verizon shares lost value year-to-date through the end of August.

There may be more downside ahead, so think twice before betting your hard-earned capital on Verizon’s growth prospects.

Bad Publicity for Verizon

Just in case Verizon didn’t have enough problems to deal with already, along came a Wall Street Journal report that cast the telecom company in a negative light. Allegedly, Verizon “and other telecom giants have left behind a sprawling network of cables covered in toxic lead that stretches across the U.S.”

These cables are reportedly found “under the water, in the soil and on poles overhead.” Verizon wasn’t the only named culprit, but evidently isn’t in the crosshairs of some investigative journalists.

Verizon might, eventually, be the target of a regulatory probe because of public health concerns over lead cable contamination. Just consider the financial impact that a government crackdown would have on Verizon.

Citigroup analyst Michael Rollins may have had this risk in mind when he issued a “high risk” rating on VZ stock. This alleged toxic lead contamination story has recently been covered by the WSJ, Barron’s as well as Kiplinger. Stay tuned, as it’s a developing story that could cause ongoing problems for Verizon.

Considering VZ Stock? Think About This First

We’ve told you about Verizon’s large and growing debt load. Furthermore, we pointed out the recent drop in Verizon’s earnings, profit margin and operating income.

In other words, Verizon may be a telecom giant, but this doesn’t mean the company is in a good financial position to continue paying out hefty dividend distributions.

The situation might not improve anytime soon, as a Bloomberg report observed that “Slowing subscriber growth has weighed on carriers’ shares this year.”

Verizon’s dividend payouts will entice some financial traders. Remember, though, that a company’s dividend yield might be high simply because the share price has gone down.

VZ stock is down substantially since late 2020. But at least the shareholders can count on those juicy dividend payments, right?

Don’t be so sure. Verizon’s dividend payout ratio is quite high, at around 53%. The payout ratio measures the portion of a company’s earnings that are being paid out in dividends.

When a dividend payout ratio exceeds 50%, that’s a red flag. Investors should wonder whether Verizon can continue to shell out so much of its earnings as dividend distributions.

If there’s a dividend cut, you can probably predict what might immediately happen to the VZ stock price.

VZ Stock Isn’t a Telecom-Sector Winner

Verizon may have to deal with the financial and reputational fallout of a lead toxicity scandal. It’s another problem for Verizon in 2023, which is already facing an enormous debt burden.

Therefore, we’re sounding the alarm bell once again. The last thing we want to see is financial traders falling into the Verizon dividend trap.

In the final analysis, the best grade we can give VZ stock now is a “D.” It’s not a high-confidence pick, so feel free to look but don’t be tempted to touch that “buy” button.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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