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Is Vodafone Group plc A Super Income Stock?

vodafone

Shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US) have had a strong year, rising from £1.85 one year ago to around £2.45 at the time of writing. This gain of over 30% compares favourably with gains made by the FTSE 100 of 5% over the same time period.

In addition, Vodafone has paid over £0.10 per share in dividends over the same time period, proving its worth over the last year as both a growth and income stock. However, with the sale of its stake in Verizon Wireless and a significantly higher share price than one year ago, can Vodafone still be classed as a super income stock?

With a yield of 4.5%, Vodafone can still be considered a high-yielding share (despite its previously mentioned price rise). This compares favourably to the FTSE 100’s yield of 3.5% and is significantly better than the interest rates received on a typical high street bank account. Crucially, it’s also more than double current levels of inflation.

However, where Vodafone disappoints relative to many of its FTSE 100 peers is regarding dividend growth rates. Certainly, Vodafone has impressed in the past on this front, with it delivering annualised growth in dividends of over 7% during the last five years. During normal economic conditions such a figure would be appealing, but for it to post such gains while the world economy has been faltering is mightily impressive.

The future, though, looks set to be somewhat different than the past. Vodafone’s dividend per share is forecast to be the same in two years time as it is today, which means that in real terms (after the effects of inflation have been taken into account), Vodafone’s dividend will be lower in two years than it is today.

Furthermore, Vodafone’s dividend payout ratio (the proportion of profits paid out as dividends) remains relatively high. For instance, in the current year its dividend payout ratio is roughly 75% and, over the next two years, this figure looks set to increase. Certainly, Vodafone is a mature company in a mature sector and, as such, can afford to be generous with dividends. The dividend payout ratio, though, indicates that it may be prioritising dividends over reinvestment in the short run.

Despite this, Vodafone remains a relatively attractive income play. Its yield is considerably above average and, although dividends per share are set to be the same in two years as they are today, Vodafone continues to provide a stable income for investors. While its dividend payout ratio is slightly high, its debt levels remain low and expansion can be financed through borrowing rather than reinvestment. Therefore, while not quite a ‘super’ income stock, Vodafone remains a ‘very good’ income stock at least.

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Peter does not own shares in Vodafone.