These high-yield stocks are unusual for different reasons. But I think they both have the potential to deliver big income and long-term capital gains for patient investors.
Industry insiders spy value
Vodafone Group (LSE: VOD) is one of the biggest mobile operators in Europe and Africa, but its performance has disappointed investors in recent years. A share price slump has seen Vodafone’s dividend yield rise to more than 8%.
Fortunately, I think the outlook may be starting to improve.
Vodafone’s problems are not a mystery. Investors (and journalists) know what those problems are and have been talking about them for years. In short, the group is too large, too complex, and has too much debt.
Competitive markets in Spain, Italy and the UK mean that profitability is too low. Last year, Vodafone generated a return on capital employed of just 5%.
Former chief executive Nick Read had opportunities to make big changes, but somehow dodged them. For example, he rejected an €11bn offer for the group’s Italian business.
As a result of this unusual situation, Vodafone has attracted some big telecoms industry investors who now control 22% of its shares. Presumably, they see value in this business. I’d guess they may also have given their support to the appointment of new CEO Margherita Della Valle.
The main risk I can see is that Vodafone will continue to struggle to boost profits in highly-regulated European markets. That could lead to a dividend cut and further share price falls.
However, press reports suggest Della Valle is keen to deliver what’s needed. After nearly a year without progress, a report in the Financial Times last week suggested that the company is now very close to agreeing a £15bn deal to combine the Vodafone and Three networks in the UK.
My guess is that more deals will follow. In the meantime, I think Vodafone’s dividend will probably remain safe, despite looking a little stretched to me. I see the shares as a buy at current levels.
A bargain cash machine?
FTSE 100 asset manager M&G (LSE: MNG) is a different situation altogether. This business offers investors a 9.8% dividend yield. This jumbo payout is supported by strong cash generation from M&G’s Heritage life insurance business.
Heritage provides annuities and other life insurance products, but it’s closed to new customers and is in run-off mode. As a result, it releases a steady stream of cash each year.
Alongside this, M&G has a modern asset management business that’s showed improved performance over the last couple of years. 2022 was a tough year for fund managers, but M&G outperformed some large rivals and secured net inflows of investor cash.
As an investment, I think the main M&G downside is that it’s complex and difficult to analyse. In reality, we have to take the company’s figures on trust.
However, M&G has performed well since its spin-out from Prudential in 2019 and I’m happy to continue trusting the company’s guidance. With the shares offering a yield of 9.8%, M&G is my top choice for a purchase among super-high-yield stocks right now.
