The Ticking Time Bomb That Could Force Income Investors to Sell Verizon Stock

If you're an income investor, Verizon Communications (NYSE: VZ) stock may look like a no-brainer on the surface. It is one of only three nationwide 5G providers, and the massive cost of building a competing network makes an increase in competition unlikely.

Moreover, the 5.8% dividend yield is far above the S&P 500 (SNPINDEX: ^GSPC) average of 1.1%, and a 20-year streak of payout hikes usually implies that more dividend increases are likely.

However, when one takes a closer look at Verizon's financials, they point to a ticking time bomb. Although addressing that issue could ultimately help its stock price, dividend investors should probably stay away from the communications stock. Here's why.

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The ticking time bomb for Verizon

Verizon's growing issue is its total debt. It now stands at $172 billion, up from $158 billion at the end of last year and $144 billion in the year-ago quarter. This is well above the $105 billion in total equity, representing a huge burden for the company.

Most of the recent debt increase came from its $20 billion acquisition of Frontier Communications, which closed earlier this year. Investors may also recall its $53 billion purchase of C-band spectrum in 2021. That probably improved the quality of its wireless network but also increased its debt.

Additionally, Verizon continues to spend heavily on capital expenditures (capex). It plans to spend $16 billion to $16.5 billion in capex this year, down only slightly from the $17 billion spent in 2025.

The problem for Verizon is also that its 20 years of dividend increases have come at a tremendous cost. On the surface, its Q1 free cash flow of $3.8 billion was enough to cover the $2.9 billion in dividend costs.

Nonetheless, that leaves only $0.9 billion for share repurchases, investments in the company, and yes, debt repayment. Amid the rising debt, interest expenses were $1.9 billion in Q1 alone, up from $1.6 billion in the first quarter of last year.

That financial reality may ultimately leave Verizon with no choice but to cut or suspend its dividend to help reduce these costs. The same thing happened to rival AT&T (NYSE: T) in 2022. High debt levels from the failed DirecTV and Time Warner acquisitions led it to abandon its 35-year streak of annual dividend hikes and to cut the dividend by nearly 50%.

Such a move may prompt income investors to sell the stock, leading to a near-term decline. Admittedly, a lower debt burden may later lead investors to buy the stock as its balance sheet strengthens, but that transition bodes poorly for Verizon's stock price in the shorter term.

Moving forward with Verizon

As one of the largest communications services companies, Verizon is likely to continue generating positive free cash flows. Also, a reduced debt load should eventually boost the stock as its balance sheet strengthens.

However, the dividend is claiming most of its free cash flow, making it difficult for Verizon to reduce the massive total debt that has strained its balance sheet. Thus, if one owns Verizon for the dividend income, they should probably get out now and seek cash returns in other investments.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.