The FTSE 100 is littered with excellent dividend-paying stocks. As a dividend seeker, I’m looking to create an additional income.
I’m not going to fall into the trap of thinking a high yield equals a good investment.
Pitting Vodafone (LSE: VOD) and Legal & General (LSE: LGEN) shares against each other, which is a better buy for me if I had the cash to spare today?
Let’s take a look!
What they do
Vodafone is one of the biggest telecoms firms in the world, with an extensive reach and brand power.
Legal & General is a financial services business specialising in life insurance and retirement planning products.
Vodafone shares are down 21% over a 12-month period, from 89p at this time last year, to current levels of 70p.
Legal & General shares have meandered up and down, but are up 6% over a 12-month period. At this time last year, they were trading for 238p, compared to current levels of 254p.
The pros and cons
Starting with Vodafone, a whopping 10.9% dividend yield is enticing. Part of the yield being so high is due to the share price falling. Plus, the business seems to be in a transition phase.
It recently announced it is selling its Italian business and looking to streamline the group overall. In other news, it also announced a dividend cut of close to 50%. However, substantial share buybacks could be on the way in the coming years to offset this.
From a future view, potentially exciting growth in the African telecoms market could drive investor returns upwards.
Furthermore, Luka Mucic, the chief financial officer, just spent £1.71m of his hard-earned cash on shares. When insiders are buying shares, this can be a sign of confidence that a business is heading in the right direction.
My biggest gripe with Vodafone seems to be declining performance, as well as huge debt levels. These could hurt investor returns. However, the shares look good value for money on a price-to-earnings ratio of just six.
Moving to Legal & General, its dividend yield is a healthy 8.8%.
The business could come under pressure from cyclical struggles, a bit like now. As consumers battle with a cost-of-living crisis, planning for retirement could be put on the back burner, hurting the firm’s performance and returns.
However, the business has great long-term prospects, with an ageing population and its solid reputation, as well as a healthy balance sheet to navigate choppy waters.
Recent updates have been positive, and the business has increased dividends for around six years now. The only two times the business didn’t increase its payout in recent history was when the pandemic struck and the financial crash of 2008. However, I’m conscious that dividends aren’t guaranteed. Plus, the past is not an indicator of the future.
My verdict
If I could only buy one out of the two right now, I’d be more inclined to buy Legal & General shares over Vodafone. However, I do like the look of Vodafone shares too.
Legal & General’s investor rewards policy, track record, future prospects, and business as a whole, look a lot more solid to me right now.
Cyclical shocks are a worry, but the business has experience, and a track record that shows it can cope and emerge from the other side to continue to offer shareholder value.
