Investing in FTSE 100 stocks been a winning strategy for share pickers for decades. A combination of healthy share price gains and impressive dividend income means the UK’s leading index has delivered a 7.5% average annual return since 1984.
Telecoms giant Vodafone Group (LSE:VOD) has a long record of paying enormous dividends. And today it looks magnificently cheap to me.
The firm trades on a forward price-to-earnings (PEG) growth ratio of 0.5 for the upcoming financial year (to March 2025). A reminder that a reading below one indicates that a share is undervalued.
Meanwhile, its dividend yield sits at a mighty 8.7%. It’s the sort of reading that could supercharge my passive income.
A £100 second income
Let’s say I wanted to grab a dividend income of £100 from Vodafone shares. I could achieve this by buying 19,737 shares in the business (assuming that broker projections prove accurate).
At a current share price of 69.7p, I would need to spend £13,757 to do this. I think that’s pretty good value for a three-figure monthly income that could grow over time.
It’s important that explain that City analysts expect Vodafone’s dividend to fall year on year in financial 2025. They also think shareholder rewards will drop once again the year after.
But on the plus, Vodafone shares still produce that near-9% dividend yield for the upcoming financial year. And the yield remains elevated at 8.3% for financial 2026, also well above the 3.8% FTSE 100 average.
Furthermore, rumours of dividend cuts at Vodafone have been swirling for years. And yet the dividend has remained locked at 9 euro cents, even during the pandemic.
Debt questions
This is thanks in part to Vodafone’s defensive operations. Consumer spending on mobile phones remains stable across the economic cycle. And especially so in our increasingly digitised world. This in part provides telcos with predictable profits and cash flows that are essential for dividends.
Cash flows are especially impressive in this sector, with Vodafone guiding for adjusted free cash of €3.3bn for this year.
So why are City analysts expecting dividends to be trimmed, then? Well, keeping the grid up and running is extremely expensive and Vodafone has racked up massive debts as a result. It had a hefty €36.2bn worth of net debt as of September.
A top dividend share
The good news, however, is that debt is dropping rapidly. It fell more than 20% in the 12 months to September. And heavy streamlining, which will include the axing of 11,000 jobs in the next three years, will help the business continue repairing the balance sheet.
Vodafone also continues to hive off non-essential assets to boost its financial position. As I type, it is in “exclusive discussions” with Swisscom to sell its Italian operations in a deal that could raise €8bn.
Dividends can never be guaranteed. And past performance is not a reliable indicator of the future. But I believe Vodafone should meet (or perhaps even exceed) dividend forecasts for next year at least. It’s why I’m considering adding it to my portfolio today.
