The Motley Fool

I’d buy Vodafone shares today, but first I’d snap up this dirt-cheap FTSE 100 income growth stock

Image source: Getty Images

Vodafone Group (LSE: VOD) shares are up almost 4% this morning after it maintained its all-important dividend and reported only a small dip in first-half profits. The telecoms giant has been a FTSE 100 income hero for years and currently yields 6.9%. I’d buy it today.

While Vodafone’s shares look tempting, there’s another FTSE 100 income stock I like even more, because it offers growth potential on top of income. But more of that later.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Vodafone’s shares jumped after it posted a 2.3% drop in first-half revenue to €21.4bn. Thanks to cost cutting, EBITDA profits fell just 1.9% to €7bn. This is a strong performance, given the year we’ve had. 

Vodafone shares look tempting

The lockdown has hit companies in all sorts of strange ways. Today, Vodafone reported a slump in roaming revenues, as international travel collapsed, while handset sales also fell. Group CEO Nick Read could still hail “resilient” first-half performance and flag up the group’s “good commercial momentum.” This was driven by increased customer loyalty, a rising fixed broadband base, and significant cost savings.

As well as the dividend, full-year guidance has also been maintained. Next step is to arrange the IPO of Vantage Towers, lined up for early 2021. I’d buy Vodafone today but I wouldn’t expect too much share price growth, as it’s idled for years. For me, this is purely a long-term dividend stock, but a jolly good one.

Vodafone will pay out an estimated £2.23bn this year. This makes it the seventh biggest payer on the FTSE 100, making up 4% of total shareholder payouts. My worry is that it’s only covered 0.7 times by earnings, although City analysts point to some good news on this front.

They predict earnings will rise 18% next year and 43% in 2022, lifting the earnings per share to 8.44p. This is higher than the projected 8.34p dividend per share. This gives me the confidence to buy Vodafone at today’s share price, despite its relatively high valuation of 22.2 times earnings.

I’d buy Rio Tinto’s shares first

And the other FTSE 100 dividend stock I’m even more tempted to buy? Mining giant Rio Tinto (LSE: RIO). The business is on course to pay out an incredible £3.8bn in dividends this year, the fifth most generous income payer on the index, making 6.8% of total payouts.

Right now, the Rio Tinto share price gives you a 6.9% yield. This is more generously covered than Vodafone’s, at 1.5 times earnings. Unlike Vodafone, its shares have rebounded strongly since the March crash, and are up more than 50% since then. It helps that Rio Tinto’s largest client, China, is rebounding strongly from the pandemic.

Investors are feeling more optimistic about shares generally after last week’s Pfizer vaccine news, and the mining giant’s sector is a great way to play a global economic recovery. We may have to wait until 2021 for that, but I’m tempted to take a position in Rio Tinto today. I reckon it offers me an attractive entry point, trading at just 9.1 times earnings.

If I could buy just one of these two stocks today, it would be Rio Tinto.

You might prefer this.

Did Boris Give This Stock a £50million+ Boost?

On February 3rd, 2020, Boris Johnson made a surprise announcement…

…potentially helping to grow one little-known British company’s revenues by an expected £50million+.

You probably saw this announcement in the news. But we bet you’ve never heard of the company which we believe could profit.

Get the full details here – while you have time.

Harvey Jones 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.