This 7%-Yielding Dividend Stock Is Safe and Growing More Secure

Verizon (VZ -0.68%) currently offers a big-time dividend. The yield is up to an eye-popping 7%, following a roughly 30% slide in the stock price over the past year. That puts its payout several times higher than the S&P 500, which currently yields slightly more than 1.5%. 

High dividend yields are often a warning sign that the payout is at risk of reduction. But a closer look at Verizon's financial metrics suggests its dividend is on very solid ground.

And with its free cash flow expected to improve in the coming years, the payout should grow even safer. Because of that, it's an attractive option for investors seeking a big-time passive income stream.

A cash flow machine

A quick glance at Verizon's most recent cash flow statement might give dividend investors some cause for concern:

Data source: Verizon. 

As that table showcases, Verizon fell about $400 million short of covering its dividend during this year's first quarter. While that's a vast improvement from the $1.7 billion shortfall in the year-ago period, it's still a seemingly big gap.

However, that quarterly snapshot doesn't show the whole picture. For that, we need to zoom out and look at its cash flow statement over a full year:

Data source: Verizon. 

As this table shows, Verizon generated enough cash to cover its dividend last year with about $3.3 billion to spare. Meanwhile, over the past 12 months, it produced $4.5 billion in post-dividend excess free cash flow (FCF).

That enabled Verizon to pay down some debt. It ended the first quarter with a leverage ratio of 2.7 times, down from 2.8 times in the year-ago period. It's a solid level for the telecom giant. It backs Verizon's strong bond ratings of A-/BBB+/Baa1.

It's about to get even better

Verizon recently reached an inflection point. The company funded the remaining $1.75 billion under its C-band related spending program to help accelerate its 5G network in the first quarter. As a result, capital spending will decline meaningfully from here.

The company expects full-year capital spending to range from $18.3 billion to $19.3 billion this year, down from $23.1 billion last year. Meanwhile, it sees spending falling to around $17 billion next year, a more than $5 billion improvement relative to 2022. 

Operating cash flow should also improve after declining last year. Verizon's capital investments should help grow its revenue and cash flow.

CEO Hans Vestberg said in the first-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."

In addition, late last year, the company unveiled a new cost-saving program. It's aiming to cut its annual costs by $2 billion to $3 billion by 2025. Rising operating cash flow and falling capital expenses position Verizon to generate a lot more FCF. 

The company's growing FCF has it "expect[ing] to see significant improvement in our dividend payout ratio this year," Vestberg said on the first-quarter earnings call. He also said that this will put the company "in a strong position to increase the dividend once again and bring us closer to our debt targets over the following years." Verizon delivered its 16th consecutive annual dividend increase last year. 

Verizon's long-term target is to get leverage down to an even safer 1.75 to 2 times. It plans to start using some of its excess free cash to repurchase shares once leverage hits 2.25 times.

An increasingly sustainable high-yielding payout

Verizon's big-time dividend is already on a firm foundation. It generates plenty of cash to cover its expansion program and its shareholder payout, enabling it to strengthen an already rock-solid balance sheet.

The payout's foundation will only grow stronger in the coming years as FCF grows, enabling it to further improve its balance sheet. That will allow the company to continue increasing its dividend. This combination of financial strength and yield makes Verizon an excellent stock for those seeking an attractive and sustainable passive income stream.