Investing in income shares is a good way to earn regular cash payouts from the stock market. One useful metric for investors to consider when analysing stocks to buy is the dividend yield they offer.
At present, the FTSE 100 index sports a 3.9% yield. This compares favourably to many overseas peers such as the S&P 500. But looking closer at the index’s individual constituents, two dividend stocks currently offer double-digit yields.
I’m talking about Vodafone (LSE:VOD) and Phoenix Group Holdings (LSE:PHNX). These dividend heavyweights currently provide whopping yields of 11.95% and 10.02%, respectively.
Vodafone
Although the Vodafone yield is very enticing, it’s fair to say the five-year chart for the share price looks ugly.
The global telecoms giant has shed more than half its value since December 2018, which serves as a useful reminder that mammoth yields often arise as a result of big share price falls.
A huge net debt mountain has weighed on the group’s performance over the past few years. Yet the picture here has improved somewhat, with the total falling to €36.2bn, down from €45.6bn in the prior year.
However, that’s still concerning measured against a market cap less than half that size. It’s also come at a cost. Vodafone’s had to sell various business units to shore up the balance sheet.
Turning to earnings, although revenue growth in Germany is recovering, the group’s performance in Italy and Spain remains weak. The picture is still mixed.
Nonetheless, the prospect of an imminent merger with rival network Three could potentially be the spark needed to trigger a rebound in the share price.
Regulatory approval is still needed and this isn’t guaranteed. Yet early noises from the European Commission seem positive, with all eyes on the UK’s Competition and Markets Authority.
Phoenix Group Holdings
The Phoenix Group share price has also dropped over five years, but to a lesser extent than Vodafone. The stock’s down 8% in that time frame.
This UK-focused closed life insurance and pension fund consolidator has an excellent dividend track record. Passive income payouts have grown in recent years and the company has made uninterrupted distributions for well over a decade.
While this isn’t the most sexy sector out there, big change has been afoot at Phoenix Group. The company recently merged its Standard Life and Phoenix Life Assurance divisions and believes the tie-up could help it achieve its upgraded cash generation target of £4.5bn in the 2023-25 period.
This sounds promising, but I’m wary of some major risks facing the group too. Forecast dividend cover isn’t as strong as I’d like at just 0.8 times earnings. This suggests investors tempted by the dividend yield should exercise caution.
Moreover, markets anticipate UK monetary policy will loosen next year. Interest rates are tipped to fall to 4.25% by the end of 2024. If they fall more rapidly than expected, this could potentially have an adverse impact on Phoenix Group’s liabilities and solvency.
Stocks to buy?
I’m tempted by the monster yields offered by these income shares. However, I have some significant worries too.
Ultimately, neither company’s distributions look as secure as I’d like. Accordingly, these two shares will stay on my watchlist for now as I find other dividend stocks to buy.
