Verizon (VZ) currently offers a monster dividend. Its yield is approaching 8%, driven higher by the continued decline in its stock price. Shares currently sit 20% below their 52-week high, weighed down by myriad concerns.

However, a growing chorus of Wall Street analysts view the sell-off in the telecom stock as a buying opportunity. They believe that the fears surrounding the company are overblown. Furthermore, they think the company can continue increasing its already massive payout.

I wholeheartedly agree. That’s why I’ve been piling into shares this year. Here’s a look at what some analysts recently said about Verizon, and why I’m buying the high-yielding dividend stock hand over fist these days.

The view on the Street
Citi analyst Michael Rollins recently raised his rating on Verizon from neutral to buy while nudging up his price target from $39 to $40. He also upgraded shares of rival AT&T (T) to buy while maintaining his $17 price target. The Citi analyst noted that both stocks took a big hit following a Wall Street Journal report about the potential risks of the lead-sheathed cables they used to build their legacy telecom networks. He believes those fears are a bit overblown.

Meanwhile, Rollins thinks the wireless industry is stronger than many believe. He pointed out that growth has exceeded expectations. On top of that, Verizon and AT&T are pushing through price increases (instead of ramping up competition) while cutting costs. That should enable them to produce more free cash to reduce debt and support their dividends.

Morgan Stanley analyst Simon Flannery is also bullish on Verizon. He recently released a report stating his belief that Verizon will likely announce another dividend increase this month. Flannery believed the payout boost will be about 2%, matching last year’s total, the company’s 16th straight year of dividend growth. That’s exactly what Verizon delivered, increasing its payout by 1.9% and pushing its streak to 17 consecutive years.

A big factor driving that view is Verizon’s strong free cash flow. The telecom company expects to produce about $17 billion this year, more than enough to cover its $11 billion in annual dividend payments. That’s more free cash than AT&T will produce ($16 billion in 2023).

Why I keep buying the high-yielding telecom stock
My Verizon investment thesis is very similar. The telecom company generates strong and growing free cash flow, which more than covers its dividend. That’s enabling it to generate excess free cash flow to de-lever what’s already a solid balance sheet. Verizon ended the second quarter with a 2.6 times leverage ratio, down from 2.7 times in the year-ago period. That supports the company’s strong bond ratings (A-/BBB+/Baa1).

Verizon plans to continue using its excess free cash to repay debt. The company’s long-term target is to get leverage between 1.75 and 2 times, giving it even more financial flexibility. As leverage declines, the company expects to allocate some excess free cash toward repurchasing shares (once leverage falls under 2.25 times). Verizon’s steady debt paydown also reduces its interest expenses, freeing up cash flow for more deleveraging and shareholder returns.

While deleveraging has been a slow process in recent years, it should start accelerating. The company recently completed a $10 billion funding commitment for its 5G program, saving $1.75 billion in capital spending each quarter. In addition, its price increases, growth-related investments, and cost reductions should grow its cash flow. These factors should combine to enable Verizon to produce even more free cash flow next year. That will enable it to de-lever faster and should allow it to continue increasing its dividend.

I believe the financial foundation under Verizon’s attractive dividend will only grow stronger in the coming years. That’s why I also agree with Morgan Stanley’s analyst that the payout will continue rising. It’s why I’ve been piling into the stock this year, buying shares every few weeks to collect more of Verizon’s strong and growing dividend.

The buying binge will likely continue
I’ve been taking advantage of the sell-off in Verizon’s stock by gobbling up more shares. I have growing confidence that the dividend is safe and should continue rising. I’ll likely continue piling into the stock as I have cash to invest.

— Matthew DiLallo

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Source: The Motley Fool