Collecting dividends from shares is a great way to earn a passive income. Although dividends are by no means as secure as other sources of income, the distributions on offer from assets such as the Vodafone (LSE: VOD) share price could help me increase my discretionary income.
And that’s why I’ve recently been evaluating the stock to see if it could be worth adding to my portfolio.
Passive income generation
My portfolio contains a selection of dividend stocks. I’ve designed this collection with the single aim of boosting my discretionary income.
I’m considering the Vodafone share price for inclusion because of its dividend track record. The company has a reputation for being one of the FTSE 100‘s best income stocks. At the time of writing, its shares offer a dividend yield of 6%. That looks attractive to me.
Telecoms businesses are generally considered to be suitable income investments. The reason why is because they can have stable cash flows. For example, Vodafone’s telecoms network cost tens of billions of euros to construct and spans the globe. That’s not something any company can build overnight. This gives the business a competitive advantage.
What’s more, customers who want to use the group’s network usually have to sign a contract. This guarantees revenue for a set period. Agreements spanning 12-24 months are the most common. Few businesses have this kind of revenue visibility. Some consumer goods companies, for example, need to convince a customer to come back day after day to buy their products. Vodafone only needs to persuade customers once every one or two years.
I think these qualities make the company incredibly attractive as an income investment.
Vodafone share price risks
Of course, the investment isn’t without its risks. To remain competitive with other telecommunications groups, the company has to invest billions every year. This can put pressure on cash flows. The firm also has a lot of debt, amounting to a hefty €44bn at the end of September. Management is undertaking efforts to reduce this borrowing, including spinning off and restructuring business divisions. But the level of debt makes me uncomfortable.
Vodafone has already had to reduce its dividend once in the past five years to free up more cash for investment and debt repayment. There’s no guarantee this won’t happen again.
Another risk the company faces is competition. The UK and European telecommunications markets are some of the most competitive in the world. So, Vodafone just can’t cut corners when it comes to investing in its operations and customer service. The group needs to keep investing, or it’ll be left behind.
The bottom line
All in all, the Vodafone share price looks attractive as an income investment to me, so I’d buy it. However, there are certainly plenty of threats to the company’s dividend. Any one of the issues outlined above could cause the organisation to reevaluate its dividend policy.
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Rupert Hargreaves 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.