Shares of Verizon (VZ 1.17%) got shellacked earlier this week. That followed a Wall Street Journal investigation finding toxic lead in cables laid by telecom companies to build out regional telephone networks years ago. The report caused concern that Verizon could be required to remediate the problem, which could cost a lot of money. 

That sell-off pushed Verizon's dividend yield up to around 8%. That's several times the market's average (the S&P 500's dividend yield is currently around 1.5%). It suggests investors are concerned that the telecom giant might need to reduce its payout. 

I don't subscribe to that bearish view, which is why I've been buying Verizon's stock for its dividend hand over fist. Here's why I'm still not worried about Verizon's dividend, even after the latest revelation.

Not an issue in the near term

The potential lead cable issue facing Verizon and other telecom companies likely won't affect the industry for quite some time. A spokesperson for the USTelecom trade association recently commented on the issue, stating, "We have not seen, nor have regulators identified, evidence that legacy lead-sheathed telecom cables are a leading cause of lead exposure or the cause of a public health issue." It's unclear whether Verizon and others will need to remove those legacy lead-sheathed telecom cables. 

Further, even if the company is liable, it could be years before it must bear the costs. Raymond James analyst Frank Louthan IV wrote to clients, "It seems reasonable that the cost of this will be spread out over 10-plus years, further minimizing the risks to the carriers and their investors." Likewise, any related legal liability would likely take years to materialize, given past litigation for lead-based issues. For example, settling a lead-paint lawsuit with manufacturers took nearly two decades of litigation. 

Meanwhile, even though regulators have yet to flag the issue, Verizon is proactively addressing any potential problem. It plans to start testing sites for potential lead contamination. That could enable it to rule out areas that wouldn't need future remediation while proactively addressing those that do before they become a greater concern. 

The financial flexibility to handle the situation

It's unclear how much money, if any, Verizon would need to spend to address a potential lead problem. However, the company has the financial strength to cover costs that could arise in the future.

Verizon already generates significant excess free cash after funding investments to expand its 5G network and big-time dividend. In 2022, Verizon produced $3.3 billion in excess free cash after paying dividends ($10.8 billion) and funding capex ($23.1 billion). Meanwhile, 5G-related capex spending has peaked and will start coming down. The company expects 2023 spending to be between $18.3 billion and $19.3 billion, while 2024's should be around $17 billion. Assuming flat operating cash flow, that would increase its excess free cash by around $5 billion. However, the company's investments in 5G are starting to drive revenue growth, while it's also seeking to cut an additional $2 billion-$3 billion in costs over the next few years. Those catalysts would further boost free cash flow. 

The company plans to use that excess free cash to strengthen its already solid balance sheet. Verizon has an excellent bond rating (A-/BBB+/Baa1) backed by a solid leverage ratio of 2.7 (and down from 2.8 in early 2022). Its long-term target is to get leverage down to an even lower range of 1.75-2.0. That would give it even more financial flexibility, putting it in an even stronger position to handle lead-related liabilities. 

The company's improving cash flow and strengthening balance sheet drive the view it can continue increasing its already attractive dividend. Verizon gave its investors a 2% raise last September, marking its 16th straight year of increasing the payout. That's the longest current streak in the U.S. telecom sector. While the company might limit dividend growth in the future until there's more clarity surrounding its lead liabilities, its growing financial flexibility positions it to at least continue giving investors modest annual raises. 

The dividend seems safe

The market sold off shares of Verizon on the hint of a potential lead problem. While it's certainly possible the telecom giant could have some liability, it will probably take years for that to affect the company. In the meantime, Verizon's cash flow and balance sheet are improving, putting it in an even better position to handle any future liability while also continuing to pay its attractive dividend. That's why I'm not worried about Verizon's ability to maintain its dividend. Instead, I plan to continue buying shares to increase my dividend income from the telecom giant.