Every investor has their own set of saving and investing goals, based on their personal financial situation. And an investor’s portfolio should be built around these goals. For example, a younger investor, saving for retirement might be willing to take more risk and will allocate a higher percentage of their portfolio to equities. On the other hand, an older investor, nearing retirement, will look to preserve capital and generate income with a basket of bonds.
But almost all investors should allocate a certain percentage of their portfolio to low-risk income stocks like Vodafone (LSE: VOD).
Low-risk income stocks like Vodafone have bond-like qualities, but with two key advantages.
Firstly, Vodafone’s dividend yield usually exceeds the yield on the highest-rated corporate bonds. For example, the iShares Aaa – A Rated Corporate Bond ETF currently supports a yield of 2.5%, compared to Vodafone’s dividend yield of 4.6%. Secondly, unlike bonds, Vodafone’s shares can produce a certain level of capital growth, which will complement income and protect against inflation.
Buy and forget
As one of the world’s largest mobile telecommunications companies, Vodafone isn’t going to go anywhere any time soon. However, due to its size and regulatory barriers, the company’s growth is sluggish.
Still, Vodafone is a cash machine, and the company has earned its reputation as one the FTSE 100’s biggest dividend payers. The company currently pays out almost all of its profits to investors via dividends.
And this trend looks set to continue for the near future. In fact, some analysts believe that Vodafone’s dividend could grow rapidly over the next few years as the company reaches the end of its European investment program and free cash flow increases.
Indeed, during the past few years Vodafone has spent billions to create a pan-European mobile telecommunications network, with 4G coverage across the continent.
This investment is already starting to pay off. During the first quarter of this year, Vodafone’s group service revenue grew 0.8%, which was better than many analysts had expected and put a stop to years of service revenue declines. What’s more, during the quarter Vodafone reported that its customer contract churn in every market has fallen to new record lows. Also, full-year data traffic is now set to grow at a very healthy rate of more than 60%.
So, as Vodafone returns to growth, the company would make the perfect addition to any buy-and-forget portfolio. The company is committed to its dividend payout, and the payout should only increase with earnings over the long-term. Further, Vodafone currently supports a dividend yield that exceeds that on offer from high-quality corporate bonds and the wider FTSE 100.
Over the past ten years, after including dividends Vodafone’s shares have produced an annual total return of 8.5%. Over the same period, the FTSE 100 has produced an annual return of only 6% including dividends.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.