I’d shun Vodafone’s 11% yield and buy this FTSE 100 stock for passive income in 2024

The connectivity giant boasts a stonkingly high dividend yield. But Paul Summers would rather get his passive income fix from another FTSE 100 stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businesswoman analyses profitability of working company with digital virtual screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With a forecast dividend yield nearing 11%, at the time of writing, I can see why investors seeking passive income might gravitate towards Vodafone (LSE: VOD) shares. Even so, I think there are far better alternatives.

Too good to be true

At first glance, it seems absurd to shun the connectivity and digital services provider — it’s easily the highest-yielding stock in the FTSE 100 right now. By comparison, the index itself yields ‘just’ 3.8%.

However, it’s because this yield is so big that I’m reaching for my bargepole. You see, an eye-watering dividend stream is usually a sign that the market has concerns over how a company is performing. This can lead to a wave of selling which pushes the share price lower and the yield even higher (they are negatively correlated).

For me, the biggest issue here is that Vodafone still has far too much long-term debt on its balance sheet. Yes, assets are being sold to address this but not at a rate I’d like. And the longer this burden remains, the more payouts are at risk.

Low cover

Based on analyst estimates, Vodafone will be unable to meet this year’s total dividend with expected profit. Now, the shortfall isn’t huge and the situation is projected to improve slightly in FY25. But it hardly inspires confidence. I look for dividend cover of at least 1.5 times. Two times is ideal.

For balance, the shares now change hands for a little less than 10 times forward earnings. That’s arguably cheap relative to the UK stock market as a whole. So if general sentiment continues to improve at the rate it has over recent weeks, Vodafone could deliver a tidy capital gain in addition to income in 2024.

Notwithstanding this, a horrible performance over the last five years makes the opportunity cost of tying my cash up here too big to contemplate.

Better track record

One stock I’d pick over Vodafone for passive income for 2024 would be consumer goods giant Unilever (LSE: ULVR).

Again, that might seem a bit odd. The Marmite-maker’s share price has been in similarly poor form this year. However, if I assume this momentum will eventually reverse (and I’m inclined to think it will as the cost-of-living crisis abates), there’s an argument for banking the passive income in the meantime.

But it goes a bit deeper than that. Unilever has a better track record of annually hiking its payouts. To me, that sends a signal that this company is resilient. By contrast, Vodafone’s record over the last few years has been unsurprisingly woeful.

On sale

So what are the potential downsides to backing Unilever right now? To me, there are two that jump out.

First, Unilever stock yields 4.0%. That’s higher than the index but a lot lower than over at Vodafone (if we assume the latter isn’t cut).

Second, there’s a possibility that some shoppers won’t return to branded goods. I think this is unlikely. History shows that memories of tough times quickly fade and habitual spending returns.

And with Unilever’s shares now cheaper than they’ve been in years (a forecast P/E of under 16 for FY24), I think the investment case here is more attractive.

Now I just need to find some cash to buy the stock.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever Plc and 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.

More on Investing Articles

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Dividend Shares

How much passive income could I generate with just £10 per day?

Ken Hall wants to create his £10,000 yearly passive income dream by investing just £10 every weekday day in Footsie…

Read more »

Investing Articles

Is the Rolls-Royce share price too high? Here’s what the experts say

The Rolls-Royce share price has surged over two years, representing one of the FTSE 100’s greatest success stories. But is…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

A top S&P 500 growth share and an ETF I’d buy this November!

I think this S&P 500 share and exchange-traded fund (ETF) could be brilliant additions to my ISA or SIPP right…

Read more »

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »