What is a good yield for a blue-chip FTSE 100 share?
At the moment, the average is around 4%. So the 5% of Barclays or 8% of Imperial Brands may be considered good.
But personally I think a good yield is one that looks likely to remain at an attractive level.
One share I own now has a yield of 11.9%. Yet it is a FTSE 100 business with a well-known brand and customer base stretching into the hundreds of millions. Such a high yield is often a red flag for investors. Should that be the case here too?
Double-digit dividend yield
The share in question is telecoms giant Vodafone (LSE: VOD).
Vodafone’s share price has collapsed 59% over the past five years. That partly explains why the yield has now reached the level it has.
Still, a big decline in share price and unusually high yield are often hallmarks of a business in trouble. Could that be the case for Vodafone – and what might that mean for the dividend? After all, the company has past form in cutting its dividend. That happened in 2019.
Challenging environment
I do think Vodafone faces some difficult choices.
It has a net debt running into tens of billions of euros. It has been shrinking its business in the past couple of years by selling off operations in some countries. That may well reduce revenues and profits. Telecoms is also an expensive sector in which to operate, thanks to the high costs of building networks and paying for licenses.
Set against that, I think the business has quite a lot going for it.
That massive customer base, well-recognised brand, and a leading position in many markets are all positive attributes. It is profitable and cut net debt by around a fifth last year. I reckon it has the makings of a business that can generate sizeable profits for years to come.
Dividend sustainability
Is that enough to keep paying out the dividend?
Vodafone could cut its dividend by a quarter or even half and still have a yield significantly higher than the FTSE 100 average.
But it could also maintain its dividend at the current highly lucrative level, in my view.
A new chief executive who started this year has already had the chance to cut the payout but has not done so. The falling net debt weakens one of the key arguments to cut the dividend, as a healthier balance sheet could make it easier for the FTSE100 giant to maintain its payout.
Selling businesses has raised cash for Vodafone but its possible impact on profits is a concern to me. However, I think the company may well maintain its monster dividend. If I had spare cash to invest at the moment, I would be happy to buy more Vodafone shares for my portfolio.
