Verizon Communications (VZ 1.40%) is often considered a reliable income stock. It's one of the largest telecom companies in America, and it's raised its dividend for 18 consecutive years. But over the past five years, its stock price declined nearly 30% as the S&P 500 advanced more than 90%.

Verizon's stock stumbled as it struggled to gain new wireless subscribers. But at $42 a share, it looks undeniably cheap at 9 times forward earnings and pays a hefty forward yield of 6.5%. Do that low valuation and high yield make Verizon an undervalued dividend play? Or is it a high-yield trap that will erase its own dividend gains with its declining stock price? Let's see if we can find some answers.

Image source: Getty Images.

What happened to Verizon over the past few years?

In 2024, Verizon generated 76% of its consolidated revenue from its consumer segment, which hosted 115 million wireless retail connections (83% of which were postpaid connections), 10 million broadband connections, and approximately 3 million Fios video connections at the end of the year. The rest of its revenue is mainly from its business segment, which provides a mix of wireless, wireline, networking, and security services to its commercial customers.

Over the past five years, Verizon's growth in postpaid wireless subscribers was sluggish as it struggled to keep pace with AT&T's and T-Mobile's lower prices and aggressive promotions. As Verizon's consumer business struggled, its business wireline segment floundered as more companies replaced their legacy ethernet networks and on-premise servers with wireless plans and cloud-based services. That's why its total revenue growth decelerated.

Data source: Verizon.

In 2024, Verizon's consumer business stabilized as its total number of wireless retail postpaid subscribers grew 1.4% to 95.12 million. It attributed that growth to its localized incentives and marketing campaigns, the flexibility of its customizable "myPlans," and its fruitful distribution partnership with Walmart. Its ongoing promotions still squeezed its margins, but it offset that pressure by trimming its workforce and divesting its lower-margin businesses.

Verizon's adjusted earnings per share (EPS) declined 2.5% to $4.59, but that still easily covered its $2.67 per share in dividends for the full year. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which excludes its recent divestments, severance costs, and other one-time charges -- increased 2.1% to $48.79 billion.

What will happen to Verizon this year?

In the first quarter of 2025, Verizon's revenue rose 1.5% year over year, its adjusted EPS grew 3.5%, and its adjusted EBITDA increased 4.1%. Unfortunately, it lost a whopping 289,000 postpaid phone subscribers, while AT&T and T-Mobile gained 324,000 and 495,000 new postpaid wireless phone subscribers, respectively, in the same quarter.

Verizon offset that pressure by selling more wireless equipment and gaining more broadband, 5G home internet, and Fios subscribers, but it's clearly struggling to keep pace with AT&T and T-Mobile in the wireless race. To accelerate the expansion of its fiber networks and reduce its dependence on the crowded wireless market, Verizon agreed to buy Frontier Communications (FYBR -0.04%) in a $20 billion takeover last September. That deal is expected to close by the first quarter of 2026.

For 2025, Verizon still expects its wireless service revenue to grow 2% to 2.8%, its adjusted EPS to rise 0% to 3%, and its adjusted EBITDA to increase 2% to 3.5%. It expects its annual free cash flow (FCF) to decline 6.7% to 11.7% as it ramps up its spending and gears up for its takeover of Frontier.

Analysts expect Verizon's revenue and adjusted EPS to both grow 2% this year. That outlook seems stable, but it will require the company to consistently expand its higher-growth businesses as it finds fresh ways to counter AT&T and T-Mobile in the postpaid wireless market. Its adjusted EPS estimate of $4.69 this year will also easily cover its forward annual dividend rate of $2.71 per share -- and that low payout ratio still leaves it plenty of room for future hikes.

Is Verizon an undervalued dividend stock or a high-yield trap?

I wouldn't consider Verizon to be an undervalued stock, since its growth is anemic and it faces fierce competition from AT&T and T-Mobile. But I also wouldn't call it a high-yield trap, since it clearly generates enough profits to cover its high dividends.

Instead, I would consider Verizon to be a worthwhile income investment at these levels. Its low valuation and high yield should limit its downside potential, but investors shouldn't expect it to bounce back toward its all-time highs anytime soon. Therefore, it's a sound alternative to fixed income investments like CDs or T-bills, but it's really only suitable for dividend-driven investors.