When it comes to income stocks, Vodafone (LSE: VOD) is one of the FTSE 100’s top picks. The international telecoms giant has been a mainstay of dividend portfolios for decades, and it doesn’t look as if this will change any time soon.
At the time of writing, shares in Vodafone are trading with a dividend yield of 6.5% which, compared to the average interest rate of 0.5% available on most savings accounts, is extremely attractive.
That said, Vodafone’s lack of dividend cover is always given as the reason why the company cannot support the current payout. Specifically, for full-year 2018 analysts estimate that only 70% of the €0.15 distribution will be covered by earnings per share of €0.10.
However, I believe the above figures are highly misleading because Vodafone’s income statement is full of non-cash charges such as depreciation/depletion that depress the bottom line. Stripping out these costs, the company earned €14.2bn in cash from operations last year, against a total dividend payout of €3.7bn. Free cash flow, excluding dividends, was €5.3bn.
These figures show that not only is Vodafone’s dividend safe for the time being, but there’s also room for growth.
Exploring the international market
As well as Vodafone, Manx Telecom (LSE: MANX), the leading communication solutions provider on the Isle of Man, is another cheap dividend stock I believe deserves a place in your portfolio.
A crucial part of Manx’s growth strategy is expanding outside of its home market through several international partnerships including China Unicom, one of the world’s largest telecoms companies, to sell SIM cards to Chinese tourists. Today the firm reported, alongside figures for the 12 months to the end of December, that the Unicom agreement is “now fully operational ahead of the 2018 travel season“. And while overall revenue for the period declined slightly from £80.8m to £78.5 year-on-year, I believe the China initiative, among others, should help the group return to growth in 2018.
Indeed, after incurring some costs in 2017, a transformation programme designed to deliver operational improvements should begin to pay off this year. Meanwhile, excluding costs associated with the firm’s new roaming product SmartRoam, mobile revenue grew 3.1% in 2017 and is set to continue expanding in 2018. Further, data centre revenues were impacted by customer consolidation in 2017, which pushed revenue down by 19% for the year. But during the second half, when the concentration was complete, revenues rebounded 5%. Once again, it looks as if this growth is set to continue in 2018.
Robust dividend
Overall, Manx’s reported profit for the year jumped 35% to £11.9m and reported earnings before interest, tax, depreciation and amortisation ticked higher by 1.8% to £23.1m. Underlying free cash flow, which I believe is one of the best metrics to use to value any business, rose 22.1% to £20m, giving management room to increase Manx’s full-year dividend payout to 11.4p per share.
Following this hike, shares in the telecoms business currently support a dividend yield of 6.1% and trade at a free cash flow yield of 9.2%.
So overall, Manx’s growth outlook gives me confidence that the company can maintain its current market-beating dividend yield, and even grow the payout for the foreseeable future. This leads me to conclude that the stock, along with Vodafone, is a perfect buy and hold investment for your ISA.
