You might dream of quitting your job, but you can’t do it without a replacement income. One of the best ways of building one is to invest in a portfolio of high-yielding stocks and shares.
High income
Most top FTSE 100 companies lavish investors with regular dividends but some pay mind-boggling levels of income. Two immediately spring to mind: telecommunications giant BT Group (LSE: BT-A) and mobile phone behemoth Vodafone Group (LSE: VOD).
Vodafone currently has the second highest yield on the entire FTSE 100 at a stonking 7.69%, with BT in fourth place at 6.99%. As every Fool knows, heady figures like these should be approached with caution. Yield is calculated as dividend divided by share price, so if the stock crashes it can shoot to dizzying heights, which may not prove sustainable. There’s no point buying a high income if it only lasts for a few months.
Take cover
Investors have been asking for years whether Vodafone can sustain its juicy dividend, but so far it has defied the doubters. However, cover now stands at a measly 0.8, which means it is not covered by profits, so Vodafone has to use debt to fund its shareholder largesse.
Worryingly, this looks set to continue, with forecast earnings per share (EPS) of 9.57 euro cents in the year to 31 March 2019 and a dividend of 13.26 cents, giving cover of 0.72, then back to 0.8 the year afterwards. Another concern is that last month’s Q3 results showed a 4.9% drop in total group revenue to €10.9bn, even if this was expected.
Dividend call
Vodafone remains a vast global business covering the UK, Germany, Italy, Spain, Turkey and India, that also generates plenty of cash and has a positive earnings outlook. Its stock has fallen 21% in the last year and although it still trades at a forecast 18.3 times earnings, my Foolish colleague Peter Stephens says the dip makes today a good time to buy Vodafone for the long term.
Meanwhile BT has had more than its fair share of troubles, with questionable accounting practices, overspending to acquire sporting rights, and the regulatory assault on its Openreach infrastructure division. Some people would not touch it with a bargepole as a result.
Big money
On the other hand, it does ring up splendid income and has healthy cover of 1.8. That looks set to continue, with a forecast dividend of 14.82p in the year to 31 March 2020 and EPS of 25.99p, giving continuing healthy cover of 1.75 by my calculations. The stock is down 50% in three years but trades at just eight times earnings, which is a bargain level but again, not without risks.
The dividend costs BT almost £1.5bn a year and could come under pressure, given that the company has a massive £11.3bn pension deficit and net debt of £12.2bn. On the other hand, pre-tax profits are forecast to top £3bn for each of the next two years.
Vodafone and BT stocks have their risks, but remain tempting income generators for an early retirement.
