The FTSE 100 is full to the brim with dividend shares! Here’s one I’d buy and one I’d avoid

This Fool loves dividend shares. Here, he takes a closer look at one he’d be willing to increase his position in and one he’s avoiding.

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Around 75% of the shares I own pay a dividend. I see it as one of the most effective ways to build an extra income. I reinvest the dividend payments I receive back into buying more shares.

The FTSE 100 is home to a number of high-quality companies rewarding investors with handsome yields. Most businesses on the index have been trading for decades, and they have solid business models and plenty of cash flow. When it comes to paying out a dividend, those are all positive signs.

The average yield on the index sits at around 3.6%. However, I’m placing my focus on the highest-paying stocks on the index. Here’s one I like and already own, and one I’d pass up on.

I’m not sold

Shares in telecommunications giant Vodafone (LSE: VOD) look like an absolute steal on paper. At 74.4p, its share price looks dirt cheap. Coupled with that, it has the highest yield on the index at 10.3%. But even so, I’d steer clear of the opportunity to buy the shares today.

There are a few reasons for this. Firstly, it won’t have the highest payout on the Footsie for much longer. Earlier this year, it was announced that it would be slashed in half from 2025.

In all fairness, I view this as a smart move. Its current payout was unsustainable. This move will free up €1bn a year for the business. That said, I see other issues with the company, such as its monumental €36.2bn pile of debt.

Of course, aside from its falling dividend, I do see some potential for share price growth. Under CEO Margherita Della Valle, the business has undergone a transformation that’s seen it streamline as it offloads overseas businesses to generate funds. Its share price has been gaining momentum, rising nearly 10% in May.

But even so, I think one of its main attractions was its impressive yield. With that now out of the picture, I’ll be looking elsewhere.

One I’m keen on

One stock I’ll be looking to increase my holdings in over the coming weeks is HSBC (LSE: HSBA). It boasts a solid 7.1% yield covered nearly two times by earnings.

That’s the seventh-highest on the Footsie. However, in its Q1 results, it announced a special 21 cents per share dividend following the sale of its Canadian business. Accounting for that, it yields a magnificent 11.9%.

Unlike Vodafone, the firm has also adopted a more progressive outlook when it comes to rewarding shareholders in recent times. To go with that, its shares look cheap. They trade on just 7.6 times earnings, below the wider average of the index (11).

I also like the bank for its exposure to Asia. Wealth in the continent is expected to continue growing at a rapid rate. HSBC will be a direct beneficiary of this.

That’s not to say its focus on Asia doesn’t come without risk. For example, last year its share price took a major tumble due to the firm’s exposure to the fragile Chinese property market and a writedown in the value of its stake in China’s Bank of Communications.

But over the long run, I think its investment will pay off. If I have the cash this month, I’ll add to my holdings.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Charlie Keough has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings 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.

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