Numbers Don't Lie: Verizon's Monster 6%-Yielding Dividend Is Extremely Safe and Secure

Key Points

• Verizon reported strong second-quarter results.

• The company is producing meaningful excess free cash flow after paying dividends.

• It expects to produce even more excess free cash flow in the second half of this year and beyond.

• 10 stocks we like better than Verizon Communications ›

A high dividend yield can be a warning sign that the payout isn't safe. However, despite its 6% yield, Verizon's (NYSE: VZ) dividend remains very secure. The company's recent quarterly numbers show this clearly.

Rock-solid financial results

Verizon recently reported strong second-quarter results, with revenue rising 5.3% to $34.5 billion and adjusted earnings increasing 6.1% to $1.22 per share. There were numerous positives during the period. Wireless service revenue grew 2.2% to an industry-leading $20.9 billion, while broadband and business wireless revenue also increased. Verizon added over 300,000 net mobility and broadband customers, with Fios gaining market share. The company benefited from several recent initiatives aimed at strengthening customer retention and attracting new ones.

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This capped a strong first half. Verizon generated $16.8 billion in operating cash flow over the past six months, a $200 million increase from the same period last year. It invested $8 billion in capital expenses to maintain and expand its fiber and 5G networks. That left it with $8.8 billion in free cash flow -- $300 million more than last year. This easily covered the $5.7 billion it paid in dividends, allowing Verizon to produce a healthy $3.1 billion in excess cash.

Verizon used its excess cash to strengthen its balance sheet. As a result, it ended the period with a 2.3 times leverage ratio, down from 2.5x in the year-ago period. That's a solid level and backs its healthy bond ratings (A-/BBB+/Baa1). The company's improving leverage ratio enhances its financial flexibility ahead of its $20 billion all-cash acquisition of Frontier. That deal should close in the next year and bolster its fiber offering.

Even better numbers ahead

Verizon made several moves to attract and retain customers last quarter. It launched a three-year price lock and free phone guarantee, along with several AI-powered customer service innovations to provide personalized customer service and an enhanced customer experience. These steps give it strong momentum going into the second half. That gave it the confidence to raise its full-year guidance as it progresses toward closing the Frontier acquisition.

Verizon now expects its adjusted earnings per share to rise 1% to 3% this year, up from its prior outlook of flat to up 3%. It also boosted its free-cash-flow guidance to $19.5 billion–$20.5 billion, up from $17.5 billion–$18.5 billion, due to its increasing profitability and new tax reforms. This $2 billion boost provides added flexibility ahead of the Frontier acquisition.

The company expects to capture at least $500 million in annual merger-related cost synergies after closing the Frontier deal, further bolstering its bottom line. The acquisition will also significantly expand the company's fiber network, enhancing its ability to continue growing its broadband business.

This strong and growing free cash flow enhances the sustainability of Verizon's dividend and supports future increases. The company has raised its payment for 18 straight years, leading the U.S. telecom sector.

A safe and secure place to collect passive income

Verizon's numbers show it generates ample cash to cover capital spending and its high-yielding dividend. With its new initiatives delivering results and tax changes recently passed, it's on track to produce even more excess free cash this year. Those numbers confirm Verizon's dividend is very safe. With more growth ahead and an expected boost coming from the Frontier deal, the payout's safety should only strengthen. This secure foundation makes Verizon a top choice for those seeking lucrative and steadily growing dividend income.

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Matt DiLallo has positions in Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.