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The wireless communication giant Verizon Communications (VZ - Analyst Report) hiked its annual dividend by 3% to $2.06 per share, reflecting its strong commitment to deliver increased returns to its shareholders.

Verizon will now pay a quarterly dividend of 51.5 cents compared with 50 cents paid this year. This marks the sixth consecutive year of dividend hike. Last year, Verizon had increased its annual dividend by 2.6% to $2.00 per share.

The new dividend will be paid on November 1, 2012, to shareholders of record as of October 10, 2012. The new annual payout of $2.06 represents a dividend yield of 4.70%. The dividend hike is similar to the hike by its key rival and the second largest U.S. mobile service provider AT&T Inc. (T - Analyst Report), which raised its annual dividend by 2.3% to $1.76 per share in December last year, reflecting a dividend yield of 4.70%.

Verizon distributed $2.6 billion and $5.5 billion as dividends to its shareholders in the first half of this year and fiscal 2011, respectively. By comparison, AT&T paid dividends of $10 billion and $10.1 billion in the first half of this year and fiscal 2011, respectively.

Other telecom service providers such as CenturyLink Inc. (CTL - Analyst Report), Windstream Corporation (WIN - Analyst Report) and Frontier Communications (FTR - Analyst Report) currently offers higher dividend yields of 6.80%, 10.00%, and 8.60%, respectively.  

The dividend hike reveals Verizon’s solid financial position, with a healthy balance sheet and growing free cash flows. Continued growth in wireless business and falling capital efficiency (capital expenditure-to-revenue ratio) also support robust cash flow position. Management continues to expect capital efficiency to decline through the year, leading to more expansion of free cash flow.

We have a long-term Neutral recommendation on Verizon. Currently, the stock retains the Zacks #3 (Hold) Rank for the short term (1–3 months).

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