Ep. 132: The Check Behind the Yield — PFE's Frozen Dividend, KO's 64-Year Dividend King Crown, VICI & Verizon's High Yields, Target's Turnaround, and MLPI's Manufactured Income

Picture this. You're looking at your broker-jap. Maybe you're just scrolling through some stock screeners
on a Tuesday night and you see it. A massive dividend yield. Exactly. Just flashing right there
on the screen. Maybe it's 5%, maybe it's seven, or maybe it's an eye-watering 15%. Oh yeah.
And your finger just hovers over that buy button. I mean, who doesn't want a cash deposit
that's straight into their account? It feels like free money. It really does. You do the mental math,
you multiply that yield by your savings. And suddenly, you're imagining funding your next vacation
entirely on passive income. It is incredibly tempting. I mean, we are fundamentally wired to
look for the highest immediate return. Right. I took the link. But in the markets, a headline yield
is really just a marketing number. It's just just the cover of the book. It tells you absolutely
nothing about the actual structural integrity of the business generating that cash. Which is exactly
why today's deep dive is entirely focused on what we are calling the check behind the yield.
I like that. Yeah. So we have pulled together a stack of sources today, ranging from deep dive
financial analyses on individual stocks, some sub-stack newsletters, all the way to a really fascinating
breakdown of high-income ETFs. There's a lot of good stuff in there. There is. And our mission is
to figure out what actually determines if a dividend is real and if it is going to survive the next
five years. Because that's the real question. Right. And based on the research, that survival comes
down to three things. Cash flow coverage, pay out growth, and the underlying quality of the business.
So we are going to look under the hood of several specific tickers today. We'll be pulling apart
established giants, analyzing some turnaround stories, and dissecting some complex new funds.
Just to figure out who is actually printing real money. Exactly. Who's printing money and who is
just borrowing cash to keep up appearances? Because the difference between those two things is
the difference between a sustainable income portfolio and a complete wealth trap. Yeah. A wealth
trap is a good way to put it. So I want to start by looking at what happens when you chase a high yield
without checking the engine. Let's look at Verizon ticker VZ. Oh Verizon. A classic example. On the
surface, I mean, this looks like a fortress. It has an attractive 5.53 percent yield. It boasts a
10 year unbroken streak of dividend payments. Right. And it has a payout ratio of 73.4 percent,
which on paper looks totally sustainable. It isn't eating up all their profits. So what is the fatal
flaw here? Well, the flaw is the growth rate or more accurately, the severe lack of it. Verizon's
5 year dividend growth rate is just 1.94 percent. Well, less than 2 percent. Yeah, just 1.94 percent.
That is the glaring vulnerability in what otherwise looks like, you know, a very resilient income stream.
I always think of this like like getting a yearly salary raise at your job that doesn't even
keep up with inflation. That's a great analogy. Your boss hands you a piece of paper that says you're
making more money this year. And that feels good for about 5 seconds. But when you go to the grocery
store or you pay your rent, you realize your expenses grew by 3 or 4 percent. Right. But your paycheck
only grew by less than 2. Exactly. You are technically making more dollars, but you are effectively
getting poorer. You are just losing purchasing power over time. And if we look at the underlying
mechanics of why they can't grow that payout faster, it really comes down to capital allocation.
Verizon generated a massive $6.4 billion in free cash flow in the second quarter of 2026.
That is a staggering amount of cash. It is. It easily supports the dividend. And it even supports
their $4.5 billion annual stock buyback program. So they're told in the back. The balance sheet.
They are carrying a very heavy debt load. They're stated target for deleverging, meaning getting
that debt down to a comfortable, manageable level isn't until 2027.
Oh, thanks. So all that extra cash flow is essentially spoken for. The debt acts as a ceiling.
It limits their future upside and caps how much they can actually reward shareholders with dividend
hikes. So Verizon is a classic case of what you see is what you get. You get the 5.5 percent today.
But you are slowly bleeding purchasing power to inflation. Okay. If Verizon is a slow week,
let's look at a situation that feels a lot more precarious. Pfizer ticker PFE. Yeah,
Pfizer is an interesting one right now. Pfizer has a massive 6.13 percent yield and a 15-year
dividend growth streak. But according to the analysis, that streak is technically on life support.
The harsh math here is that Pfizer's payout has been completely frozen at exactly 43 cents per
share for seven straight quarters. Seven quarters, so almost two full years. Right. It hasn't been cut,
which is what most casual observers would notice. But it hasn't been raised by even a fraction
of a cent either. Right. Because of how Pfizer's dividend calendar works, right? They declare their
annual rate in December. Yep. In December 2025, they held it flat. That means all of 2026 is paying
exactly the same as 2025. So the growth streak hasn't technically broken yet, but it is completely
stalled out. So the make a break moment is this upcoming December 2026 declaration. That single
boardroom decision will decide if they raise it by even a penny to keep the streak alive,
or if they hold it flat again, which officially breaks the 15-year streak. But we need to do the
check behind the yield here. Why are they freezing it in the first place? The answer lies in the
coverage ratio. And this is the most critical number for Pfizer right now. In fiscal year 2025,
Pfizer generated $9.08 billion in free cash flow. Okay. $9.08 billion. However, they paid out
$9.77 billion in dividends. Wait. Wait. So they paid out more
dividends to shareholders than they actually generated in free cash flow from their entire business.
Yes. The coverage ratio was .93x. The dividend consumed 108% of their free cash flow.
That is wild. When a company finds itself in that position, it forces a really dangerous game of
financial jenga. That extra cash has to materialize from somewhere else. Right. You can't just invent
money. Exactly. It means management is forced to dip into their cash reserves or worse use the
balance sheet and issue new debt just to cover the gap and pay shareholders. Okay. I want to challenge
that slightly though because Pfizer is sitting on about $51.8 billion in net debt. They are.
And they also have the notorious patent cliff limbing where some of their older blockbuster
drugs are losing their exclusivity, meaning generic versions will just flood the market.
Right. The revenue from those drugs will drop off a cliff. Exactly.
So to survive that, they have to pour billions into research and development to fund a new pipeline
of medicines. Uh-huh. Given all of those headwinds, isn't freezing the dividend actually the most
responsible move? Like, why would they stretch their balance sheet just to satisfy an arbitrary streak?
You know, that is a very valid assessment. And it illustrates why a freeze is considered a
middle state in corporate finance. The middle state? Yeah. It lacks the confidence and safety of a
raise, but it avoids the sheer panic and stock sell off of an outright cut. It is management quietly
tapping the brakes. Makes sense. But when you compare Pfizer to their peers, the structural weakness
becomes pretty obvious. Look at GSK, GlaxoSmithline, they rip the bandaid off and reset their dividend
a while back during a corporate spin off. And today, their dividend coverage is a fortress like
2.49X. Their payout only consumes 40% of their free cash flow. Wow. That's a huge difference from
108%. Exactly. Or look at Abvy. They maintain strict dividend discipline, despite offering lower
headline yields than Pfizer. And their payout takes up just 65% of their cash flow. So Pfizer is
just stuck in the middle. They offer the highest headline yield of the three, but they have the weakest
coverage, a payout that stopped growing. And they are essentially borrowing to fund it. It's a massive
warning light. If their cash flow softens even a little bit more, that .93X coverage ratio gets
dangerously worse. Okay. So if Verizon and Pfizer show us the risks of a high yield masking underlying
weakness, what does actual sustainable dividend growth look like? Well, it requires a business model
that is almost inevitable. The antidote to a dividend trap is finding a business where the dividend
is simply the natural exhaust of a highly profitable booming machine. The royalty of the income world,
the dividend kinks. Yes. These are companies that have increased their payouts for 50 consecutive
years or more. And you honestly can't talk about dividend kinks without talking about Coca-Cola,
ticker KO. Oh, absolutely. They are sitting on 64 straight years of dividend increases.
Just think about what has happened in the last 64 years. A lot. Multiple recessions, wars.com busts,
housing crashes, a global pandemic. And every single year, they raise the payouts.
Credible consistency. Right now, they pay $2.12 per share, which is roughly a 2.3% yield.
Now, 2.3% might not make your heart race compared to Pfizer's 6%. But the magic here is in the
compounding over time. And there is no better historical example of this compounding than Warren Buffett.
Berkshire Hathaway bought a massive stake in Coca-Cola decades ago. Right.
Today, based on that $2.12 payout, Buffett's company receives roughly $848 million dollars every
single year in dividends. Almost a billion dollars a year. Just dividends. But we have to look at
his yield on cost to really understand why that's so powerful. Let's define that for a second,
because that's a crucial concept for anyone listening. Yield on cost isn't based on today's stock price,
right. It's based on what he originally paid for the shares. Exactly. Because Buffett bought the stock
so long ago at much lower prices, and Coca-Cola has relentlessly grown the dividend every year since,
his personal yield on cost is over 60%. Over 60%. Wait, so he is making more than half of his
original multi-billion dollar investment back in pure cash every single year. Every single year.
That is wild. The sources make a critical point here, though. This isn't financial engineering.
Coca-Cola isn't borrowing money to pay Warren Buffett. No, not at all.
The dividend is backed by soaring second quarter volume. It's backed by everyday consumer
purchases, soft drinks, water, juice. Things people buy every day. Yeah, it's a product people buy,
regardless of whether interest rates are 2% or 7%. The dividend is safe because the underlying
business is inevitable. It doesn't require a constant technological reinvention to keep generating cash.
And that concept, the business quality and capital allocation drive dividend safety is perfectly
illustrated by another dividend king in our sources. Target, ticker, TGT. Target, okay, let's talk
about them. Target yields about 2.77%. And what is fascinating here is that they prove dividend
growth can come from a fundamental internal turnaround, not just writing macroeconomic tailwinds.
Right. Target really had to get back to its discount routes. But I want to dig into the mechanics of
this because cutting prices sounds counterintuitive when you were trying to make more money to fund a
dividend. It does sound backwards. They went in and cut prices on over 10,000 items. They invested
heavily in store redesigns. How does lowering your profit margins on a box of cereal translate
to a safer dividend? Well, it comes down to the elasticity of demand and retail volume. By cutting
prices on everyday items, you compress your margins slightly, yes, but you drive massive foot traffic.
Oh, okay. When a consumer comes in for cheaper groceries, they also walk past the apparel section,
or the home goods section where the margins are much higher. The impulse buys. Exactly. The sheer
volume of transactions more than compensates for the price cuts. You can see this in their second
quarter results. Sales were up 5.3% to 26.5 billion dollars. That's huge for a retailer that size.
Yeah. And digital sales were up nearly 9%. Same day deliveries by 25%. And they're adjusted earnings
per share more than double to $4.11. So the through line we're looking for is organic cash flow.
Target's dividend is safe and has room to grow because it is backed by surging undeniable profitability.
They aren't scraping the bottom of the barrel to find cash like Pfizer was. Right. Target is
generating massive free cash flow by actively winning back market share. Which brings us to a difficult
reality for many income investors. If you want supreme safety, you often have to accept a 2% or
3% yield. Okay, let me play double that if you get for a second. Go for it. I hear the logic behind
Coca-Cola and target. But if I'm a retiree or I just want substantial passive income today to pay
my bills, 2.77% might not cut it. Sure. Do we really have to settle for that to get safety?
Like, what if I want a high yield, but I don't want to trap? Well, our source is point to an alternative.
High yield done right through structurally advantaged businesses. Specifically, we're looking at
VCI properties, ticker, VCI. Right. Yeah, it's a real same investment trust or REIT. Currently yielding
about 6.8%. No, a 6.8% yield definitely gets the attention of anyone looking for income.
And unlike Verizon, the payout is actually growing at a healthy clip. It went from $1.17 in 2019
to $1.80 recently. Okay, so real growth. Furthermore, the analysis points out it is trading
at a forward price to earnings multiple of 9.2. Okay, just so we're all perfectly clear on the
math here. A forward PE of 9.2 means you're basically paying $9.20 for every $1 of expected earnings over
the next year. Exactly. In the broader market, stocks often trade at 20 or 25 times earnings.
So paying just nine times earnings in the real estate world implies a massive discount,
or margin of safety. It is a significant discount. But to understand, if that 6.8% yield is safe,
we have to do the check behind the yield on their underlying assets. VCI owns 103 locations,
and these aren't small properties. What are we talking about here? We are talking about massive
hospitality assets like Caesar's Palace and the MGM grand in Las Vegas. See, this is where I have to
push back. Yeah. The casino and hospitality business is notoriously cyclical. It is. If there's a macro
economic recession, the first thing everyday families cut from their budget is a trip to Vegas.
If hotel bookings dip and people stop gambling, how is that a safe foundation for reliable 6.8% income?
It's a crucial question, but answering it requires completely flipping your perspective on how commercial
real estate works. VCI is simply the landlord. They do not care if the casino has a bad night at
the blackjack tables, or if hotel bookings dip for an entire quarter. They insulate themselves from
that volatility by using what are called triple net leases. Walk us through the mechanics of a
triple net lease. Let's say the air conditioning breaks at Caesar's Palace. Who pays for that?
The tenant does. Wait, really? The tenant pays the building repairs. Yes. A triple net lease means
the tenant ceasers or MGM is responsible for paying the property taxes, the building insurance,
and all the maintenance costs, including that broken air conditioner. As wild.
VICI essentially has zero operating expenses on the property. They just collect the rent check.
Furthermore, they boast 100% occupancy across their properties, and their average lease term is roughly
40 years. 40 years. So they are essentially operating like a long-term corporate bond just wrapped in a
real estate trench coat. The cash flow is completely locked in. Yes, but it's actually better than a
traditional bond because of inflation protection. 45% of those leases have built-in inflation escalators.
Oh wow. So if the consumer price index goes up, the rent ceasers pays automatically goes up to.
This is what we mean by high yield backed by ironclad contracted cash flow. It is structurally
designed from the ground up to protect the dividend, passing all the operational risk onto the tenant.
Okay, VICI shows us how to get 6.8% safely by leveraging brilliant contract structures.
But let's escalate things. Let's. You look out into the market right now,
and there are investors chasing massive double-digit yields using very complex exchange traded funds.
If 6.8% is high yield done right, what on earth is a 15% yield? Where does that money actually come from?
That brings us to manufactured income. The research highlights a newer fund called MLPI.
The NEO's MLP and energy infrastructure high income ETF. That's a mouthful MLPI. MLPI.
It boasts a massive 15% distribution paid out monthly. To understand how they manufacture that
number without collapsing, we have to look at the two separate engines creating this cash.
Okay, what's engine one? The first engine is master limited partnerships or MLPs.
This is the energy infrastructure part. Right. Think of MLPs as the toll roads of the energy sector.
Traditional energy companies like oil drillers see their profits swing wildly based on the daily
price of a barrel of oil. Sure, very boom and bust. The MLPs own the physical pipelines.
They charge based on the volume of oil and gas moving through their pipes. Whether a barrel of oil
is trading at $100 or $60, the toll fee stays exactly the same. I see. That structural stability
allows them to naturally pay out higher distributions usually around the 6% to 7% range. I follow the
pipeline logic. Charging by volume rather than price makes total sense. But that only gets us to
6 or 7%. You're telling me this fund pays 15%, where on earth is the other 8% coming from? You can't
just manifest cash out of thin air. You can't manifest it, but you can trade potential growth for immediate
cash. That is engine number two covered calls. Options. Yes, the fund managers sell call options on
the portfolio to harvest premium. Selling a covered call is a bit like renting out a house you own,
but giving the tenant a locked-in contract to buy it next year at a set price. You get great cash
upfront today, the premium. But if property value skyrocket in the meantime, you are forced to sell
at that locked-in price, meaning you miss out on the big payday. By selling the upside of their
energy stocks, MLPI collects constant cash upfront even if the sector trades flat. So there are some
massive structural pros and cons to this strategy. Let's start with the pros specifically around taxes.
Taxes are huge here. If you've ever owned an MLP directly in your brokerage account,
you know they hand you a schedule K1 at tax time. And K1s are notoriously difficult. They are in
nightmare. They arrive late, they severely complicate your tax returns, and they can create absolute
havoc in a retirement account. But by packaging these MLPs into an ETF structure, MLPI absorbs that
complexity and simply gives you a standard 1099 form. For a 0.68% expense ratio, they make the
tax headache go away. The convenience is a huge factor for retail investors. But there isn't even
bigger tax advantage hidden in the structure. Return of capital or ROC. Return of capital. A large
portion of MLPI's monthly distributions are often classified this way. What's fascinating about
return of capital is that it isn't taxed as immediate income in the year you receive it. Let's break
down how that actually works in practice because it's a brilliant deferral mechanism. It lowers your
cost basis. So if you buy a share of MLPI at $50 and over the course of the year you receive $5 in return
of capital distributions, the IRS doesn't tax that $5 on your return. Instead, they view your new purchase
price as $45. You don't pay taxes on that money until you finally sell the ETF years down the road.
Right. And when you do, it's taxed at the much lower long term capital gains rate.
It is incredibly tax-efficient. But, and this is the crucial check behind the yield for manufactured
income, we have to ask the catch question, what are you giving up to get a tax-efficient 15% in monthly
cash? Because there's no free lunch in the market. Every strategy has a trade-off. So what are my
giving up? You were giving up total return and risking NAV erosion. NAV being net asset value.
Right. The actual underlying share price of the ETF itself. The analysis compares MLPI to a similar
plain vanilla pipeline fund called MLPX, which just holds the stocks and doesn't use options.
OK, MLPX. Because MLPI sells those covered calls we talked about, they cap their upside.
When energy stocks surge in a bull market, MLPI doesn't get to participate in the full rally.
They traded that growth away for the instant cash premium.
So over the long run, the actual share price of the ETF might stagnate or even slowly bleed downward,
even while it throws off these massive 15% monthly cash payments.
It has lower price volatility, which helps income investors sleep at night,
but it will almost always lag in total returns during a raging bull market. Furthermore,
we talked about pipelines being toll roads. That implies stability. But what happens if a severe macro
economic shock hits? Look at 2015 when the oil market collapsed, or 2020 during the pandemic lockdowns.
People stop driving entirely, factories power down. The traffic on the toll road dries up.
Exactly. If drilling stops and volume drops significantly, the toll booth stops collecting money.
The underlying MLPs would be forced to cut their distributions, which means the foundational
engine of MLPI's 15% yield would crack. Yeah, that makes sense. It is much more stable than
owning raw oil exploration stocks, but it is absolutely not immune to a deep macro economic shock
that halts physical energy consumption. If we step back and look at the journey we've taken today,
it is overwhelmingly clear that the yield percentage flashing on your screen is just the starting
line. It tells you almost nothing about the safety of your money. The real story is always written
in the cash flow and the business model. It's written in Pfizer, struggling to cover its payout
with a dangerous 108% ratio. It's in Verizon's inability to beat inflation because its balance sheet
is weighed down by debt until 2027. But it is also written in the triumphs. It's in Coca-Cola's 64
years of compounding quality that turned a modest initial investment into a 60% yield on cost for
Warren Buffett. That's the dream. It's in target reinventing its business to drive massive retail
volume and organic cash flow. It's in the clever 40-year triple net lease structures of VCI,
making volatile casinos operate like ultra reliable corporate bonds. And it's in the complex,
but entirely honest, trade-offs of manufactured options income like MLPI. You know, before we wrap
up, there is one final thought on MLPI and that energy pipeline sector from the research that I
think is worth mulling over. Oh, what's that? We hear constantly about the booming artificial
intelligence industry and the massive valuations of tech stocks, but AI data centers require historically
massive amounts of electricity and natural gas to run. They are power-hungry behemoths.
That is a fascinating connection. If you truly believe the AI boom is real and sustainable, could
these quote-unquote boring energy infrastructure toll roads actually be the ultimate back-door AI
investment? Oh, I see where you're going with this. They might provide the physical infrastructure
gains driven by AI's insatiable power demand, but without forcing you to pay those terrifying,
sky-high tech stock valuations, you get to sell the picks and shovels during the gold rush and
collect a massive yield while doing it. Now, that is something to think about. A 15% yield from an
energy pipeline fund secretly acting as an infrastructure play for artificial intelligence.
Pretty wild to think about. It just goes to show you truly never know what you will find when you
look under the hood of these businesses. So next time you're on your broker-jap and that massive
double-digit yield is flashing at you and your finger is hovering over the buy button. Take a breath.
Do the math on the cash flow. Check the pay-out growth, analyze the business quality,
and always check the engine behind the yield. Thanks for joining us on this deep dive. We'll catch you
next time.