With the current market conditions in the UK being uncertain, I feel now is the time to look for longer-term value opportunities in the FTSE 100 that can hopefully provide a good income stream for investors. At the same time I want to try and limit the risk of losing a percentage of capital from the share price performance. One such share I believe ticks these boxes is Vodafone (LSE: VOD).
The benefits of a high-yield dividend stock
On average, an easy-access cash ISA offers a rate of around 1.4% currently. Having cash parked here is termed low risk as the value of the ISA is extremely unlikely to depreciate in value. However, there is no upside potential beyond the rate of 1.4%.
On the other hand, if an investor owned a stock such as Vodafone, they would be currently picking up an annual dividend of just under 5%. This is over three times the amount paid from the average cash ISA, which is the main benefit. The risk here is that the capital is not protected, and so the return could be reduced if the share price of Vodafone falls.
How has Vodafone performed recently?
The first thing I would note is that Vodafone has recently cut the dividend to shareholders, but this is not a massive reason to panic. The new boss, Nick Read, said in May that this cut was to reduce the debt burden and allow investment into new technologies. This can be taken as a longer-term positive as this should increase profitability further down the line.
Due to this short-term news, along with below-average company performance, the share price hit the lowest level in five years back in May. I thought at this point the stock was undervalued, but wanted to see proof that it had bottomed out.
The turning point?
At the end of July, the news came out that Vodafone was planning to sell off its mobile mast business. This comprises over 61,000 masts, with analysts valuing the separate entity at up to €20 billion. The share price climbed almost 10% the same day and has been rallying since.
I believe that with Read implementing a new strategy of reducing debt, selling off parts of the business to streamline operations and indeed investing in new technology, the future is bright for Vodafone.
In terms of risks, it is worth highlighting the debt level of the company. It currently has approximately €50 billion of debt in all forms. I mentioned earlier that the dividend cut was in part to reduce such debt levels. Whilst this is a good thing, any company that has more debt than current market capitalisation (€50bn vs €48bn) should definitely be kept a close eye on.
Overall, I feel Vodafone offers investors a high-yield dividend stock which they can benefit not only from the dividend, but that they can also be confident of having an upward trending share performance.
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Jonathan Smith has no position in any of the shares mentioned. 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.