I’ve just bought a great value dividend stock and it isn’t Vodafone

This high-yield FTSE 100 dividend stock is even cheaper than Vodafone but, in my view. it offers superior recovery prospects with less risk.

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At first glance, telecoms giant Vodafone (LSE: VOD) looks like an unbeatable dividend stock with the FTSE 100’s biggest yield of 10.6%. Unfortunately, it behaves like a great lumbering beast, lurching from one misfortune to another.

The share price has been going backwards for as long as I’ve been investing. It’s halved over five years, and is down 24.64% over the last 12 months. Despite its troubles, I know plenty of investors who are standing by the stock, because they think the income is simply too good to miss.

Many are putting their faith in new CEO Margherita Della Valle carrying through her turnaround plan. She is well aware of the scale of the task, but lumbering beasts aren’t easy to turn around. It’s even harder when dragging net debt of €36.2bn behind them.

Trouble ahead

It isn’t all bad news. On 14 November, Vodafone reported a 4.2% increase in first-half group service revenues to €18.62bn. That was enough for Della Valle to claim that “Vodafone’s transformation is progressing”.

Adjusted free cash outflow of €1.5bn is expected to double to €3bn in 2024. The board declared an interim dividend of 4.5 euro cents per share. Yet I’m still wary about the dividend’s sustainability, given the sky-high yield, previous cuts, and the many challenges Vodafone still faces.

Investing is about choices and I’ve already made mine. On Wednesday, I bought more shares in FTSE 100 housebuilder Taylor Wimpey (LSE: TW). Despite operating in a different sector, it has a similar profile. The stock is ultra-cheap, trading at just 6.56 times earnings, which makes it slightly cheaper than Vodafone’s 7.31 times.

It also offers a super-high dividend yield, currently 7.46%. While that’s more than three whole percentage points below Vodafone’s, I feel it’s more sustainable. The key difference is that Taylor Wimpey seems to be a more orderly operation. Its struggles are primarily down to events beyond its control, as rising interest rates hit property prices, sales and orders, while high inflation has driven up input costs.

It’s building up

Given today’s trying circumstances, management is doing well. It now expects full-year operating profit to be at the top end of its guidance range of £440m-£470m, thanks to a “focus on optimising price and sharp cost discipline”. The share price is up 21.55% over one year, although it’s down 17.81% over five.

I’ve bought shares in Taylor Wimpey on three occasions in recent months. Twice in September and again on 15 November. My final purchase was inspired by news that inflation dropped to 4.6% in October, which supported my view that interest rates have peaked. With luck, mortgage lenders will feel the same and trim rates further. There’s talk of the Bank of England cutting base rates by the spring. Taylor Wimpey should benefit from all these trends.

It still faces risks, of course, as house prices could slide further as household budgets crack and redundancies rise as the economy slows. Yet Taylor Wimpey seems built for tough times, and I’m not sure Vodafone is.

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.

Harvey Jones has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended Vodafone Group Public. 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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