MENU

HSBC Holdings plc And Royal Dutch Shell Plc Are Good Homes For Your Vodafone Group plc Cash

vodafone

Investors in Vodafone (LSE: VOD) (NASDAQ: VOD.US) will be deciding where to reinvest the cash they’ve just received from the company — and also possibly cash from sale of the Verizon Communications shares recently credited to their accounts.  For many shareholders, the free dealing on offer for the remainder of this month and the complexity of monitoring and holding a US stock will prompt them to sell those shares.

Reinvest?

A logical strategy would be to reinvest in Vodafone itself. Investors generally hold it as an income stock, and the company should maintain about the same yield in the future. With the value of shareholdings having been roughly halved by the consolidation, reinvesting cash proceeds back into Vodafone would broadly maintain the same level of dividend income as shareholders received prior to the sale of VZW.

I’m happy to let my stake in Vodafone halve, though. It may have the same yield, but there is much more uncertainty surrounding where Vodafone goes from here. Uncertainty equals risk. It has a lot of cash and ambition to extend its reach into cable operations in Europe. That has upside, but also execution risk. There are potential bidders in the wings, with AT&T‘s recent statement merely putting things on ice a few months, but Vodafone’s stock still has some bid potential in its price, to my mind. So there’s upside and downside to that, too.

Alternatives

Investors looking for alternative reliable, high-yielding stocks could do worse than consider HSBC (LSE: HSBA) (NYSE: HSBC.US) or Shell (LSE: RDSB). Both have excellent dividend track records and are relatively cheap just now, making for an inviting entry price.

HSBC survived the financial crash relatively unscathed, even continuing to pay a dividend in the depth of the crisis (though cut by half). Its global scale, prudent management and top-notch capital ratios make it one of the safest banks around. Most of its profits are generated in Asia Pacific — one reason why disappointing results last year have led to a soft share price — but prudently risk assets are more geographically diversified.

Shell’s share price weakness is explained by its late arrival to the humble-pie party where all the big natural resources companies are now: eschewing big projects and large capex, selling assets, cutting costs and driving up shareholder returns. The entry ticket is to make big write-offs on assets that were bought at inflated prices in more exuberant time. Shell has now joined in, but its scale and complexity means earnings won’t rocket. However there’s an awful lot of downside protection in its massive reserves and infrastructure.

Yield

Meanwhile, both companies pay a reliable-looking and healthy yield: 5.3% for HSBC and 4.8% for Shell. Reinvest those dividends for a few years, and watch your wealth grow.

Reinvesting your dividends really does pay dividends! Over the past 25 years, about 60% of the total return from the FTSE All share Index has come from reinvested dividends.

You can learn more about how to capture the wealth-boosting power of dividends in 'My Five Golden Rules for Building a Dividend Portfolio'.  It's an exclusive report published by the Motley Fool. You can get it by clicking here -- it's free.

 Tony owns shares in Vodafone, HSBC and Shell but no other shares mentioned in this article.