Buy, Sell or Hold: Verizon Communications Inc. (NYSE: VZ) Gives Income Investors a Reason to Get Wired

Yield-seeking investors who need cash to live on are being punished by the U.S. Federal Reserve's loose monetary policy. The concept of a free market - or of a natural, risk-free rate of return - has been obliterated by the central bank, which has driven the benchmark U.S. Treasury yield down to a meager 2.5%.

So, where can an investor go to find both yield and real assets?

I would suggest looking at components of the Dow Jones Industrial Average. The Dow is full of companies that pay real yields on their common stock. And right now, Verizon Communications Inc. (NYSE: VZ) is the highest-yielding stock in the Dow Jones index. The stock is yielding more than 6% per year.

Verizon has a market capitalization of $91 billion and an enterprise value of $144 billion. While the company is fully levered up at the balance sheet, it is generating a staggering $63.5 billion in gross profit. This is one of the largest companies in the world, and should be able to weather the current economic upheaval.

Verizon is determined to grow its 3G footprint in the U.S. market. In fact, it currently has a larger wireless coverage area than AT&T Inc. (NYSE: T). Having more coverage than AT&T means there are parts of the United States where users who have no choice other than Verizon for their wireless network needs.

Where I live today, for example, the only cell service available in my house is Verizon. My wife is a long-term AT&T customer and was able to get a free micro cell tower for our house so she could continue to keep her cell service with the company. But she has no service if she leaves the footprint of our house.

I personally made the switch to Verizon and its new Droid 2 cell phone with mobile hot spot - and if Verizon ever offers the iPhone 4, my wife will be leaving AT&T.

Regardless, Verizon stock appears to be forming a bullish cup-and-handle formation over the last year. While there is little reason to expect this stock to break out to higher prices in the near term, if “QE2” - a possible second round of quantitative easing by the Fed - arrives after the election, Verizon will benefit from the lack of yield in U.S. markets. In fact, I would not be surprised if expectations of inflation drive Verizon to the $40s from the where it currently trades in the low $30s.

So let's review why Verizon is a “Buy” today:

  • It has the highest yield of all the stocks in the Dow.
  • It booked $63 billion in gross profit last year.
  • The company has the largest 3G footprint in the United States.
  • And its $91 billion market cap makes it extremely liquid.

The market is going out of its way to destroy yield, trying to force savers into spending their hard-earned cash. Let's embrace that by buying this high-quality, high-yielding stock - while we still can.

Action to Take: Buy Verizon Communications Inc. (NYSE: VZ) common shares at the market - while the dividend yield stays above 6% on an annualized basis (**).

As the wireless war is waged between Verizon, AT&T (NYSE: T) and Sprint Nextel Corp. (NYSE: S), it's investors - who can book as much as 6% yield in cash flow - that stand to win this war. Interestingly, the second-highest yield on the Dow is AT&T at 5.9%.

If you are a long-term investor who is trying to figure out where to squeeze more cash yield out of your investments, Verizon should be one of your core portfolio positions.

(**) Special Note of Disclosure: Jack Barnes holds no interest in Verizon Communications Inc.

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