Motley Fool: A 7.8% dividend to consider

Verizon Communications (NYSE: VZ) recently reported mixed second-quarter results. Net income fell 10% year over year and revenue slipped 3.5%. But with some help from pricing increases, the company’s wireless segment revenue grew 3.8%, and the broadband business is showing potential.

Progress for Verizon’s fixed wireless service was particularly strong, and it looks like there’s room for continued expansion. Through high-speed 5G offerings for homes and businesses, Verizon has been able to make its broadband services available in areas that are otherwise dominated by regional monopoly providers of wired internet. By the end of 2025, it expects to have between 4 million and 5 million fixed wireless subscribers – up from its current base of 2.3 million.

A key attraction for investors is the company’s dividend, which recently yielded a fat 7.8%. Verizon faces competition and is carrying a lot of debt, but it’s also generating billions of dollars in free cash flow that can help pay down debt while supporting its dividend. The stock also seems undervalued, with a recent forward-looking price-to-earnings (P/E) ratio around 7.1 – well below its five-year average of 10.6. (The Motley Fool has recommended Verizon Communications.)

Ask the Fool

Q. What are the world’s biggest brands? – S.G., Columbus, Indiana

A. Different organizations publish rankings of brand values regularly, with results that can vary due to different approaches and weightings.

According to Interbrand, one well-respected brand consultancy, these were the Top 10 global brands of 2022 and their values: 1) Apple, $482 billion; 2) Microsoft, $278 billion; 3) Amazon, $275 billion; 4) Google, $252 billion; 5) Samsung, $88 billion; 6) Toyota, $60 billion; 7) Coca-Cola, $57.5 billion; 8) Mercedes-Benz, $56 billion; 9) Disney, $50 billion; 10) Nike, $50 billion.

It’s interesting to see how rankings change over time. In Interbrand’s 2022 list, for example, Instagram’s brand value of $36.5 billion was up 14% year over year, while Facebook’s $34.5 billion value was down 5%.

Q. If I own 1% of a company’s stock and it earns $100 million, do I receive 1% of that – $1 million? – D.E., Erie, Pennsylvania

A. Not exactly. If you own shares of a public company, you do own a portion of it – typically a very small one, though. (For example, if you own 600 shares of Boeing, that’s only a tiny piece of the roughly 600 million shares it recently had outstanding.)

When companies report their earnings, they don’t distribute them all immediately to shareholders. Instead, they may spend some to further their growth – by hiring more workers or buying more advertising, perhaps – or to pay down debt, among other options. Many companies will reward shareholders by paying some of their earnings out as dividends, or by repurchasing (essentially retiring) some shares, which makes existing shares more valuable.

Even if a company reinvests all its earnings in growth, shareholders can profit – because as the business becomes more valuable, so, typically, does its stock.

My dumbest investment

My dumbest investment move happened in 1975, when I overheard a conversation between two friends about a promising stock that was “going to be big.” I didn’t have any money, so I didn’t buy any shares. It was Apple Computer.

Fast-forward to 1995, when another friend told me about a promising stock. Remembering my missed opportunity, I bought 300 shares at $0.34 apiece, despite a broker warning me that it was a “penny stock” and therefore a bad investment. That stake was worth nearly $5,000 some five years later. – P.S., online

The Fool responds: You did well, but your broker was right to warn you about penny stocks – those trading for less than about $5 per share. They’re sometimes referred to as “microcaps,” as they often have market values less than $300 million, or even “nanocaps,” if they’re valued below $50 million. Penny stocks are notoriously risky and can often be easily manipulated by scammers.

Researchers studying the performance from 2001 to 2010 of more than 10,000 over-the-counter (“OTC”) stocks, most of which were penny stocks, found that the median annual return was … negative 37%. Yikes!

You were lucky to end up with a solid gain. Although you missed out on Apple, remember that no one knew then how big Apple would grow – and there were periods between then and now when it didn’t look promising at all.