Verizon (VZ -1.06%) is coming off a challenging year. While the telecom giant's revenue rose slightly, its earnings and cash flow were under pressure. That's a big reason its stock has shed nearly a quarter of its value since the start of last year. That slump has pushed its dividend yield up to 6.6%, which is well above the 1.7% dividend yield of the S&P 500. 

While higher yields often hint that a payout is at a higher risk of a reduction if economic conditions deteriorate, Verizon's free cash flow indicates its dividend is on solid ground.

Producing plenty of cash

Verizon produced $37.1 billion of cash flow from operations in 2022. While that was down 6.1% from 2021 total because of higher device payment receivables (it pays vendors for new mobile devices that customers repay via installment plans), it provided the company with more than enough money to fund its capital spending and dividend outlay. The company's capital expenses totaled $23.1 billion, up from $20.3 billion in 2021, largely as a result of spending $6.2 billion on C-Band, the spectrum it needs to support its faster 5G network. 

Despite that increased spending on network upgrades, Verizon generated $14.1 billion in free cash flow. That easily covered the company's $10.8 billion dividend outlay, a 3.8% increase from the prior year, as it gave its investors a modest raise last year. It was its 16th straight year of increasing the payout. 

Verizon produced $3.3 billion of post-dividend excess cash last year. As a result, its debt declined, enabling the company to maintain a strong investment-grade balance sheet.

Hitting an inflection point in 2023

Verizon has spent the past several years investing heavily to position its business for future growth. CEO Hans Vestberg stated in the fourth-quarter earnings release: "We are rapidly building out our C-Band spectrum with the most aggressive network deployment in our company's history and are well positioned to improve and accelerate our performance. Wireless mobility and nationwide broadband will be two of the most significant contributors to our growth for the next several years." 

As the company has completed most of the heavy lifting, capital spending will decline in 2023 to a range of $18.25 billion to $19.25 billion. That includes the final $1.75 billion of its incremental $10 billion outlay for C-Band-related capital spending. The company sees capex further declining in 2024 to $17 billion, a more than $5 billion reduction from last year's level. 

With capex falling, Verizon should generate even more free cash flow in the coming years. This outlook indicates that the company should be able to deliver on its objective to continue paying an attractive dividend it intends to keep growing each year.

Given the company's already sizable dividend yield, future dividend increases will likely be modest. That would allow the telecom giant to continue producing excess cash that it can use to reduce debt, make acquisitions, and start repurchasing shares again. 

Even though Verizon already has a strong investment-grade balance sheet (A-/BBB+/Baa1), the telecom giant wants to be on an even firmer financial foundation. Its long-term target is to get leverage down to between 1.75 and 2.0 times net debt-to-adjusted EBITDA (it was 2.7 times at the end of 2022, down from 2.8 times at the end of 2021). That would put its big-time dividend on an even firmer foundation. Meanwhile, the company's CFO, Matthew Ellis, has previously stated that the company could start repurchasing shares once leverage falls below 2.25 times. 

Every indication that Verizon's dividend is safe

A high dividend yield can be a cause for concern since it often indicates investors have questions about the payout's long-term sustainability. However, Verizon's big yield shouldn't raise any alarm for investors. The telecom giant generates plenty of free cash flow to cover its sizable dividend even during its heavy investment phase. Meanwhile, with capital spending coming down, the company is on track to produce even more free cash flow in the future, putting its payout on an even firmer foundation. Verizon's big-time payout therefore makes it an excellent option for investors seeking an attractive income stream.