We at the Fool are constantly on the search for dividend yield. In this article I turn my attention to telecoms and broadcasting companies Vodafone (LSE: VOD) (NASDAQ: VOD.US) and BT Group (LSE: BT-A) (NYSE: BT.US). Both companies are strong dividend investments, but which is better?
Vodafone
As the dust has settled after Vodafone’s demerger from Verizon, where do we stand now? Well, we are left with a company with substantial cash funds, which is buying broadcasting assets around the world, particularly in Europe, as well as investing in telecoms infrastructure.
So far Vodafone has bought Kabel Deutschland in Germany and Ono in Spain. Who will the telecoms giant buy next? The names up in the air have included Liberty Global, ITV and BSkyB; whoever it eventually buys, it looks like Vodafone is biding its time in making its next purchase.
So the Vodafone of today is very much a company in transition and a work in progress. Although I have very much welcomed the strategic transformation of the Verizon demerger and Project Spring, it does mean that currently Vodafone is difficult to value. And any snapshot of the fundamentals we take now will have little meaning. The 2015 P/E ratio is 28.9, falling to 22.7 the following year, but this is misleading, because the business is cash-rich but asset-poor.
A better gauge is the dividend yield, which is 5.8%, rising to 6.1%: this is a high and rising income, which suggests Vodafone is actually a strong dividend play. But you will need the faith to believe that the financial fog which currently clouds this company will lift, and the patience to wait until Project Spring reaches completion.
BT Group
Although BT has not been buying or selling any companies it is, in a different way, undergoing a transformation every bit as radical as Vodafone’s.
The company is no longer a phone company but a company which provides phone, broadband and IT services, and most recently it has made a push into pay-tv. This broadening of the business has led to resurgent profitability, and a share price which has quadrupled since the Credit Crunch.
Amazingly, despite the increase in the share price, BT is still not expensive, with a 2015 P/E ratio of 13.3, falling to 12.6 the following year, with a dividend yield of 3.2% rising to 3.6%.
This is a company that is predicted to grow earnings year-on-year, and which can look forward to a future of expansion, rather than the gradual decline you might have predicted a decade ago. This makes the company a strong contender for inclusion in your high-yield portfolio.
However, I would temper my enthusiasm with the fact that the share price has risen a lot already, and-so might be due a pullback.
Foolish bottom line
So which should you pick? Well, this is a difficult one. Both companies are likely to grow profits into the years ahead. Both produce a high and rising income, though Vodafone’s dividend yield is higher. BT has the advantage that there is greater visibility in earnings, but having increased so much, the share price could be due a fall. Personally, I have bought into Vodafone, and BT is on my watchlist.
Overall, I’m afraid I have to sit on the fence. I’m calling this one a draw.
