One of my biggest aims for my investment portfolio is to make passive income. With that in mind, I’ve decided to buy Vodafone (LSE: VOD) shares. Here’s why.
Telecommunications giant
Vodafone is one of the largest telecommunications businesses in the world with over 150m customers. It predominantly serves European and African markets.
Let’s start by taking a look at Vodafone’s share price, which is one of things that initially attracted me to it, as well as the passive income opportunity.
As I write, Vodafone shares are trading for 74p. At this time last year, the shares were trading for 120p, which is a 38% drop over a 12-month period. It is worth noting that many UK shares have fallen in recent months due to macroeconomic volatility. This includes soaring inflation and rising interest rates.
A passive income opportunity
To start with, Vodafone shares look dirt-cheap now, especially when you consider it is one of the premier telecoms businesses in the world and is on the FTSE 100. Due to the shares falling, they currently trade on a rock-bottom price-to-earnings ratio of just two. This is substantially lower than the index and industry average.
Next, Vodafone released a Q1 report last week which showed me some positives. It said that revenue had increased close to 5% compared to the same period last year. More tellingly for me, it maintained its full-year guidance too. Finally, it managed to reduce its debt levels by a fifth. This is encouraging, as debt could hinder any passive income I hope to make.
Finally, Vodafone’s current dividend yield stands at over 10%. This is more than double the FTSE 100 average. I am aware that dividends are never guaranteed and can be cancelled at any time.
From a bearish perspective, I’m concerned by Vodafone’s debt levels on its balance sheet. Although it managed to reduce this in recent times, as mentioned earlier, debt is rarely positive for investor returns and growth prospects. Sometimes debt repayments can supersede investor returns.
In addition to this, Vodafone is at the mercy of high interest rates, which makes debt costlier to pay down. This can impact shareholder returns too.
My verdict
To summarise, there are pros and cons to buying Vodafone shares at present. I’ve decided to add some shares to my holdings. I think it is too good an opportunity to miss out on right now. This is especially the case when I take into account the current price of the shares, the dividend yield on offer for passive income, and Vodafone’s enviable position in the telecoms market.
Furthermore, Vodafone has excellent growth prospects through its access to the African market via its African consumer division. Telecoms is a growing market in the region and Vodafone is in a great position to capitalise on this. This should help boost any passive income I hope to make too.
