This Stock Just Reached a Record High Dividend Yield of 8.83%. Should You Buy It Before It’s Too Late?

Many dividend stocks have struggled over the last couple of years in an environment of rising interest rates. But for income investors looking to put cash to work, this may have created some great buying opportunities.

Income investors could get a yield approaching 9% on one of the most well-known dividend payers in the market. In fact, this company’s stock hasn’t offered a yield this high in its 39 years of dividend payments.

The stock is Verizon Communications (VZ -0.78%), which reached a 52-week low earlier this month. Investors who snagged shares at $30.14 will earn a yield of 8.83%, assuming Verizon maintains its current quarterly payout (and there’s no reason to think it won’t).

Should investors take this chance to grab Verizon shares while they’re offering a record-high dividend yield?

A massive dividend yield

Verizon’s dividend yield outstrips that of practically all other telecom stocks.

The company has a track record of raising its payout every year. Its most recent dividend increase in September brought the length of its streak to 17 years — longer than any of its biggest rivals.

Verizon’s management is committed to its dividend and the annual raises it gives shareholders. And it appears well positioned to continue paying dividends at these levels for the foreseeable future.

The company’s payout ratio — the percentage of its earnings that it distributes via its dividend — after its most recent payout hike is 57% of analysts’ earnings estimates for this year and next year. Last quarter, it paid out just 28% of cash from operations in dividends.

But Verizon does have significant capital expenditures that cut into its cash generation. It has to put equipment on towers, put fiber in the ground, and buy radio spectrum licenses to make sure its customers have solid connections. As it works to catch up with T-Mobile‘s (TMUS 0.38%) 5G network lead, management plans to spend between $18.25 billion and $19.25 billion this year. As a result, it expects free cash flow of $17 billion.

That means Verizon will pay out roughly two-thirds of its free cash flow in dividends. That doesn’t leave a lot of room for acquisitions or investments in additional spectrum assets that could help it keep up with the competition in areas where it’s lagging without taking on additional debt.

Taking on more debt right now isn’t a viable option. Verizon holds $152.7 billion of debt on its balance sheet already, and it’s actively working to bring its debt-to-EBITDA ratio down from its current 2.6 to a target ratio of 2.25.

While the dividend might be safe, Verizon doesn’t appear to offer the best prospects for growth. And while growth and stock price appreciation may take a back seat for many income investors, they can’t be ignored entirely.

My favorite dividend stock in telecom

Investors have a better option than Verizon if they want a dividend-paying telecom stock.

T-Mobile (TMUS 0.38%) just announced its first-ever dividend last month. And while it’s yielding a relatively minuscule 1.8% at its current stock price, investors should pay attention.

For one, T-Mobile is returning a ton of cash to shareholders. The board recently approved a $19 billion capital return program, which includes $3.75 billion in dividend payments.

The vast majority of that capital return, however, will go toward share buybacks, with the aim of retiring a substantial portion of T-Mobile shares. In fact, T-Mobile could achieve its 10% annual dividend increase goal simply by using its entire share repurchase authorization to buy back shares. It wouldn’t have to boost next year’s total dividend payment budget a penny, because it would have fewer shares to pay dividends on.

While T-Mobile’s total capital returns equal nearly all of its expected free cash flow right now, that’s a temporary situation. Management is purposely accelerating its share buyback plans because it sees an opportunity to buy shares now, while it believes the stock is inexpensive.

T-Mobile has the flexibility to do that because it doesn’t have as much debt on its balance sheet as Verizon. Additionally, there’s no firm commitment to buy back shares. If a better way to use that cash materializes, management may seize it.

Overall, though, investors should expect T-Mobile to return more cash to shareholders over the next year than Verizon. While most of that will be through share buybacks, the total return potential for T-Mobile stock looks far more appealing, despite its smaller dividend.