Better Passive Income Stock: Verizon vs. AT&T

Some investors focus on growth; others seek out stocks that can deliver passive income.

Today, let's focus on two well-known passive income stocks from the telecom sector: Verizon Communications (NYSE: VZ) and AT&T (NYSE: T).

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Which is the better passive income stock right now? Here's what I think.

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Verizon Communications

The company's stock enjoyed a 2024 that's been solid but not all that spectacular, with shares up about 5% year to date. Add to that the hefty $2.71 annual dividend -- representing a yield of roughly 6.8% -- and investors in Verizon banked a total return of nearly 13%.

While that is a solid year-to-date return, it still lags behind what the S&P 500 generated. And as we will see, it pales in comparison to Verizon's key competitor.

Nevertheless, the company is making headway in its key areas of focus. For a value stock like Verizon, that means improving margins, generating plenty of free cash flow, and reducing debt. All told, its gross margins increased from 56.8% to 60.3%, while net debt shrunk from $151 billion to $146 billion.

AT&T

As of this writing, shares of AT&T increased by 36% year to date, making 2024 one of the best years the telecom giant has seen in several years. On top of that, the stock pays a generous $1.11 dividend per share, which works out to a yield of roughly 4.9%. Taken together, that means shareholders enjoyed a year-to-date total return of around 45% in 2024.

The company's fast-improving fundamentals are the reason for its excellent stock performance. Take its gross margin, for example: Over the last year, it has jumped from 56.6% to 61.5%. Meanwhile, net debt has been reduced from $133 billion to $128 billion.

Which is the better passive income stock right now?

For income-seeking investors, Verizon and AT&T are both solid stocks. However, there are key differences between these two.

Verizon has a fat dividend yield of 6.8%. That means a $50,000 investment should generate about $3,400 in annual dividend income.

Compare that to AT&T, which has a yield of 4.8%. That's nothing to sneeze at, but it's about 200 basis points (or 2 percentage points) lower than Verizon's.

That means a $50,000 investment in AT&T shares should generate about $2,400 per year in dividend income -- about $1,000 less than Verizon. But this year, the performance of AT&T's stock bolstered its total return to more than three times what its competitor generated.

Looking ahead, Verizon is embarking on an acquisition of Frontier Communications. That will serve a strategic purpose, helping it compete in the bundling of various services. However, it may act as a drag on the stock due to uncertainties around the deal and the added debt the company will take on as part of the agreement.

For that reason, investors who value total returns over simply dividend income may prefer AT&T.

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Jake Lerch has positions in AT&T. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.