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Readers hoping to buy Verizon Communications Inc. (NYSE:VZ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Verizon Communications' shares before the 10th of January in order to be eligible for the dividend, which will be paid on the 3rd of February.
The company's next dividend payment will be US$0.6775 per share. Last year, in total, the company distributed US$2.71 to shareholders. Based on the last year's worth of payments, Verizon Communications has a trailing yield of 6.8% on the current stock price of US$39.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Verizon Communications
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Verizon Communications distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Verizon Communications generated enough free cash flow to afford its dividend. It paid out 81% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Verizon Communications fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Verizon Communications's earnings per share have fallen at approximately 9.2% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.