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Why Vodafone Group plc is my top dividend stock for 2018

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Finding shares that offer high dividend yields as well as strong earnings growth prospects is exceptionally challenging. In many cases, companies with strong earnings growth rightly decide to reinvest much of their profit in order to capitalise on further growth opportunities. As such, their investors usually receive a relatively low income return in exchange for the prospect of even higher earnings growth in future.

Investment appeal

However, Vodafone (LSE: VOD) is one stock that seems to offer the best of both. Its dividend yield is 5.7% and yet it also offers double-digit earnings growth in 2018 and in 2019. In fact, in the current financial year it is expected to report a rise in its bottom line of 21%, followed by further growth of 12% next year. This could not only be a clear catalyst to push its share price higher, but may also make its income prospects more sustainable.

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Sound strategy

Of course, the company has pursued what appears to be a sound strategy in recent years. It has sought to invest in its customer proposition in order to maintain a strong competitive position versus rivals. This has been a sensible move to make at a time when the quad-play market is becoming more competitive and customers are demanding more from their media providers. As such, a broader range of products is a logical step for the business to take.

In addition, Vodafone has been able to pursue an acquisition strategy that has strengthened its overall structure. Its purchase of companies such as Kabel Deutschland and Spain’s Ono at what appeared to be discounts to intrinsic value could boost the company’s profitability in the long run.

Income prospects

With inflation already standing at 3.1% and having the potential to move higher, the company’s dividend yield has significant appeal at the present time. It could cause demand for the stock to increase over the course of 2018, which means that now may be the right time to buy it.

As well as Vodafone, there are other stocks that offer impressive yields and growing profitability. One such company is recruitment specialist Staffline (LSE: STAF). It released a positive trading update on Wednesday which showed that it expects to deliver full-year results for 2017 that are in line with market expectations. Encouragingly, demand in its Staffing business has remained strong throughout the second half of the year.

Looking ahead, Staffline has the potential to increase dividends at a rapid rate. Its current payout is covered 4.1 times by profit, and this suggests that it could treble shareholder payouts without hurting the company’s financial sustainability. As such, its 2.9% dividend yield could rise rapidly and make the stock a strong dividend play for the long term. And with the company being well-placed to benefit from a potential improvement in the UK’s economic performance as Brexit talks continue, it could offer a potent mix of capital growth and income potential.

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Peter Stephens owns shares in Vodafone. The Motley Fool UK has no position in any of the shares mentioned. 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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