Investors can expect a boost in the Verizon (VZ) dividends in the coming year.iStock_000000521561XSmall-Dividends-Money-310_0-300x199

Verizon stock has been under intense scrutiny for three quarters since it announced its purchase of the 45% of Verizon Wireless it did not own, Vodafone (VOD).

Price wars in the wireless market have also hit the shares.

Are the market’s concerns justified?

No, but let’s hope Wall Street continues to misread the company and the stock, creating excellent investing and trading opportunities.

Yes, investing and trading.

Invest in the stock; trade the calls.

Using Its Balance Sheet to Acquire Subscribers

Verizon is the number one wireless carrier in the US measured by what counts.

First, high customer satisfaction, from positive customer experience ratings reduces churn or the loss of subscribers.

Second, network quality, which enables you to garner more subscribers paying more for more bandwidth.

These two factors have combined in a strategy that sees VZ using its balance sheet (not its income statement) to acquire subscribers and to get them to spend more on more advanced bandwidth.

The Verizon acquisition or the 45% of Verizon Wireless it did not own was an elegant way of using a very strong balance sheet to buy cash flow and profits from existing subscribers, eliminating the need to spend money on marketing and customer acquisition, costs that hit cash flow and profits. The only extra cost is the interest payments on the debt required by the deal.

And those interest costs are considerably less than the projected cash flow from that final 45% of the wireless business. The company (conservatively) estimates cash flow will increase 10% per share in 2014 after the cost of the deal, including interest payments. That is way too low.

Why?

VZ has its LTE (Long-Term Evolution) network fully in place, and is putting in what it calls “AWS” (Advanced Wireless Systems) capacity; this new addition to its network factors in pricing for heavy users of bandwidth. This is a clear competitive advantage over what T Mobile (TMUS), Sprint (S) and AT&T (T) can offer.

And this approach – again using their balance sheet to generate higher revenues rather than their income statement –will in turn produce greater cash flows.

Why is this boost in cash flow important to income investors?

Dividends, for a company like Verizon, are dependent on cash flow.

The bottom line: You can expect a dividend hike, if not this year, next year.

And Wall Street will catch on after they see earnings for the current quarter that come out in July and a new round of buying will begin.

This is a good time to be a Verizon shareholder.

This is only half the story.

All of this tumult (the Vodafone deal, the price wars) has increased the volatility associated with VZ stock and this in turn has created great premiums on VZ calls. And if you sell the calls, you can double or triple the current dividend yield of 4.3%.

Here is how…

If you owned Verizon stock today at around $49.40, you are probably thinking about that dividend, anticipated to be $.53 with the stock going ex-dividend on July 8.

If you sold the August $52.50 call for $.70, you end up with $1.23 per share, not just the $.53 dividend.

Do that four times a year and you collect $4.92, not $2.12.

Not a triple you say? Close – but you can get a triple, actually, if you get called out.

If you sell the August $52.50, and you get called out, you have the $.70 from the sale of the call and a whopping $3.10 from the sale of the shares, a total of $3.80 per share in about two months.

You may miss the dividend but you are far better off with $3.80 compared to the $1.23 if you are not called out.

Why not bank a triple dividend in your account while you wait for the Verizon yield continue to rise.

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