With the exception of US chipmaker Nvidia and Elon Musk’s Tesla, the top 10 purchases on the Hargreaves Lansdown investment platform are all FTSE 100 stocks.
I was surprised to see the second most popular stock (AI-play Nvidia is number one) is Vodafone Group (LSE: VOD). The mobile phone giant accounted for almost 2% of trades last week. While Vodafone has one outsize attraction to shareholders, it also has plenty of issues to resolve. So far, I have resisted buying it.
Shareholder payouts hold sway
The attraction, inevitably, is its super-sized dividend. Today, Vodafone pays income of 10.1% a year, one of the biggest on the FTSE 100.
HL clients clearly love a juicy income stream but I’ve learned my lesson by chasing double-digit yields at Persimmon and Rio Tinto. I bought both last autumn only to see their shareholder payouts slashed by 75% and 50% respectively. I fear Vodafone’s barnstormer is also at risk.
Today, the payout is covered 1.3 times earnings. That’s better than I expected but it could be higher. Another worrying sign is that the dividend per share has been frozen at €0.09 for at least five years. Often, the next step in cases like this one is a cut.
Vodafone’s huge net debt is another threat, as management could prioritise shrinking this over paying a dividend. Yet there are reasons why the dividend could hold. Management did manage to cut net debt from €41.58 to €33.28bn in 2023, while still rewarding shareholders.
New group CEO Margherita Della Valle may be reluctant to cut the dividend, given that there’s little other reason to buy the stock. The Vodafone share price is down 60.88% over five years and 38.95% over the last 12 months. Today’s 77p share price is at 1997 levels.
Consensus forecasts suggest Vodafone will yield 9.54% next year, so maybe the dividend will survive. Yet I’m not as confident as HL clients appear to be.
Another high-yielder
I was intrigued to see commodity giant Glencore (LSE: GLEN) rounding off HL’s top 10 client purchases. Again, dividend income is the attraction here, with the stock forecast to yield a thumping 10.9% this year and 9.7% next year.
The stock’s lowly valuation may also be tempting some to buy, as it currently trades at just 3.8 times earnings. Some will sense a buying opportunity here, with the stock down 20.83% over the last year.
Glencore’s dividend looks safer than Vodafone’s, with net debt under control and management sufficiently confident to announce a meaty $7.1bn of total shareholder returns in 2022, including a new $1.5bn buy back programme.
The mining sector’s big concern right now is that the all-important Chinese economy is slowing at speed, hitting demand. A US recession won’t help either. Glencore’s thermal coal production is threatened by net zero measures, although its copper production will benefit from electrification. The risks are partly reflected in today’s low valuation.
Unlike Vodafone, Glencore has delivered plenty of share price growth, although it tends to come in bursts. If I had to choose between the two, I’d buy Glencore. For both long-term income and share price growth.
