Should I buy Vodafone shares just for the 7% dividend yield?

Vodafone shares pay an attractive level of income. But is this the only reason why I should buy the stock? Here I take a closer look.

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There’s no denying that the current dividend yield from Vodafone (LSE: VOD) shares is attractive.  I like stocks that generate a high level of income. Who doesn’t? And the stock is paying almost a 7% dividend yield.

The bull case for Vodafone shares has been the income. But should I buy just because of the dividend yield? I don’t think so. While this is important, I’d also like to see some level of growth in the share price. I don’t expect the stock to deliver the same amount of gains as a tech firm. But for me, some increase in the stock price is required.

In fact, I’m not a buyer of Vodafone shares and am just watching for now. The telecoms provider released its first-quarter trading update last week. And I think this is worth taking a closer look.

Recovering

It was good news for the FTSE 100 company. Things are starting to recover. The way the pandemic hit the firm was that it reduced roaming revenue. Most people were unable to travel and use their phones abroad.

But as I said, there’s now light at the end of the tunnel. Vodafone reported a rise in its total first-quarter revenue of 5.7% compared to the same period last year. This was supported by service sales growth in Europe and Africa, as well as a recovery in handset sales.

The CEO acknowledged that “the operating and retail environment has not yet returned to normal conditions” in Europe. But as things improve and return to pre-pandemic levels, I’d expect growth to return from this region.

Africa

What I like about Vodafone shares is its M-Pesa or mobile money service business in Africa. This is clearly a growth driver and did well during the quarter. The number of customers and the transaction volume from this service increased during the period.

In fact, the company said in its announcement that M-Pesa transaction volumes have been increasing 45% year-on-year. I think that’s impressive. Africa could become an important part of business as the region develops. And it could push the stock price higher.

Debt

But I’m still concerned about the level of Vodafone’s debt. According to its 2021 annual report, net debt stood at €40.5bn, or £34.6bn, which is currently worth more than the market cap of the company.

While it’s targeting a multiple of net-debt-to-adjusted-EBITDA from 2.5-3x. I feel this is still at the high end. I appreciate that it won’t be able to reduce its leverage overnight, but it could place pressure on the shares.

Other concerns

I do have a few other concerns. Competition is fierce and I don’t think there’s much differentiating the mobile operators than price. Customers want value and often go for the cheapest deal. This could impact revenue.

Vodafone is investing in 5G, but this comes at a cost. It has launched this in several markets but I still don’t think this is enough to distinguish the firm from its competitors.

While the stock generates an attractive level of income, I wouldn’t just buy for the dividend yield. For now, I’m steering clear, but I’ll be watching closely.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Nadia Yaqyb has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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