The best easy access Cash ISA on the market at the moment offers an interest rate of 0.9%. Vodafone (LSE: VOD) shares, on the other hand, currently support a dividend yield of more than 6%.
However, buying a company just because it has a high dividend yield is not usually a sound investment strategy. Sometimes a high yield can be the mark of a company in distress.
But on this occasion, Vodafone shares seem to have all the qualities of a top income stock, I feel.
Vodafone shares on offer
Shares in the global communications giant have fallen around 20% this year. It’s easy to see why investor sentiment towards the business has deteriorated over the past few months.
The coronavirus crisis has disrupted almost every business on the planet, including Vodafone. Investors have decided to sell and move on rather than wait around and see what happens next.
Nonetheless, while Vodafone has not been able to escape the crisis entirely, it’s come out better than most. The company’s telecommunications network has been a vital lifeline for many throughout the crisis. As such, the majority of the group’s operations have been able to continue to operate through lockdowns.
This performance suggests that the market has overreacted. Vodafone shares have underperformed the FTSE 100 this year, even though the underlying business has outperformed the rest of the economy.
As such, now could be a great time to snap up a share of this business. Considering the performance of the group’s underlying business compared to its share price, the stock appears to be undervalued at current levels. Therefore, buying the stock today may lead to high capital returns in the years ahead.
Attractive income
At the same time, the level of income offered by Vodafone shares looks highly attractive in the current interest rate environment. The company slashed its dividend by 40% last year to bolster its balance sheet. Luckily, it doesn’t look as if management will do the same this year.
The company’s decision to act quickly last year, as well as its international diversification and roadmap for reducing debt, all suggest that it is more financially stable than many other income stocks in the FTSE 100.
Even if the company comes out with yet another 40% dividend reduction later this year, the yield would still stand at 3.5%. That’s more than three times higher than the best Cash ISA rate on the market at the moment.
Of course, buying Vodafone shares today does not guarantee high returns in the years ahead. There are many risks that could hold back the group’s growth in the near term. A second wave of coronavirus or prolonged economic downturn may hinder the company’s plans to return to growth.
Still, over the long term, the group’s position in the European telecoms market, international diversification and size may help it produce substantial total returns for shareholders when owned as part of a diversified portfolio.
