The Motley Fool

Would I buy Vodafone shares for the 6% dividend?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Hand holding pound notes
Image source: Getty Images.

With a current dividend of 9 euro cents per year, the Vodafone (LSE: VOD) dividend yields 6.3%. This is far higher than the majority of other FTSE 100 stocks. A high yield can indicate that the share price is too low, yet it can sometimes indicate that a dividend cut is forthcoming, or growth is extremely low or negative. So, what does it mean in this case, and would I buy Vodafone shares?

Growth prospects

Dividend growth is often contingent on company growth. Unfortunately, Vodafone has seen extremely little of that over the past few years, with revenues falling from €47.6bn in 2017 to €43.8bn last year. Profitability has also been inconsistent. This has strained the Vodafone share price, which has fallen from 235p at the end of 2017 to its current price of 122p. The limited growth may also lead to the dividend being cut at some point, which is a risk to note.  

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

But there are some signs that growth may be returning. Indeed, in the recent first-quarter trading update, revenue rose over 3%. There was also extremely promising news from Africa, where the number of customers rose 10% to over 180m. The Mobile Money sector in the area also rose strongly, with transaction volumes increasing 45% year-on-year. Therefore, Africa is seen as a major growth opportunity and there is hope that profits can rise. This will mean that the dividend can remain at current levels, or even rise further. If the company can achieve profits growth, the Vodafone share price is also likely to rise.

Financial situation

For the dividend to be paid, it is also important for companies to have a strong balance sheet. This is what worries me about Vodafone. In fact, net debt has reached over €40.5bn and this will need paid off at some point. This may be at the expense of the current dividend and Vodafone shares would likely suffer as a result.  

Indeed, Vodafone is expected to have free cash flow of €5.2bn for the upcoming year, yet I feel that this will not be sufficient. This is because it also faces around €8bn of cash calls and capital expenditures are rising due to investment in the 5G network. Last year, the group also spent €2.4bn on equity dividends, which is an added expense to consider. This means that it may have to issue more debt to pay the dividend, which is a sign that the dividend is unsustainable.

Will the dividend tempt me into buying Vodafone shares?

Although 6.3% is a very strong yield, I would not buy Vodafone as a dividend stock. This is because the dividend cover looks extremely weak, and there is potential for a dividend cut. If the dividend is not cut, I believe that this would be at the expense of the rest of the business, especially if debt is used. Accordingly, I cannot see significant upside potential in Vodafone shares. The dividend is not enough to persuade me to buy.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Stuart Blair 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.