Verizon (NYSE: VZ) pays a massive dividend. With a 6.5% dividend yield, the telecom giant has one of the 10 highest yields in the S&P 500. While a high dividend yield is often a red flag, that's not the case for Verizon.

Quite the contrary, as its big-time dividend is growing increasingly more sustainable. That was evident in its third-quarter earnings report on Tuesday.

Improvements where it matters most

When Verizon reported its third-quarter earnings, it disappointed some investors. Its revenue was flat year-over-year at $33.3 billion, which was below analysts' consensus estimate of $33.4 billion. Meanwhile, the company's net income declined from $4.9 billion, or $1.14 per share, in the third quarter of last year to $3.4 billion, or $0.78 per share.

However, the company's underlying profitability improved. Its adjusted earnings per share were $1.19, ahead of analysts' expectations of $1.18. Meanwhile, Verizon's adjusted EBITDA rose from $12.3 billion to $12.5 billion.

The company also posted growth in wireless services revenue (2.7% to $19.8 billion) and continued to expand its broadband business. It ended the period with nearly 4.2 million fixed wireless subscribers, reaching its goal 15 months ahead of schedule.

A stronger foundation under the dividend

Verizon also continued to produce a lot of cash. Its cash flow from operations totaled $26.5 billion through the first nine months of this year. That covered the company's capital spending ($12 billion) and dividend outlay ($8.4 billion) with room to spare ($6.1 billion). It used its excess free cash flow to continue strengthening its balance sheet by paying down debt.

The company ended the third quarter with its leverage ratio down to 2.5, an improvement from 2.6x in the year-ago period. While that's below the company's long-term target of 1.75x-2.0x that it initially hoped to achieve next year, it supports a solid investment grade rating of A-/BBB+/Baa1 from the three major credit rating agencies.

Verizon's leverage ratio should continue to fall in the coming quarters as it generates excess free cash flow. Credit rating agency Fitch sees Verizon's leverage ratio steadily falling toward around 2.3x by the end of next year. That expected additional improvement gave the company the confidence to use its strong balance sheet to acquire Frontier Communications in a proposed $20 billion all-cash deal. The additional debt will cause the company's leverage ratio to rise following the deal's closing, which Verizon expects will take 18 months. However, debt should come back down within two years of completing the deal as Verizon uses its growing excess free cash to repay those borrowings.