1 FTSE 100 stock with a 7%+ dividend yield that I think income investors should buy

Jonathan Smith eyes up Vodafone, with the FTSE 100 stock having an attractive dividend yield. But with large debt levels, is the risk versus reward worth it?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Finding dividend income this year has been particularly challenging. Some businesses such as Royal Dutch Shell paid out dividends to investors for decades, only to see it heavily cut earlier this year. Shell is just one example, there are plenty of others within the FTSE 100 that have done the same in order to aid cash flow as consumer demand has slowed. Despite this, there remain FTSE 100 stocks with attractive dividend yields that are still being paid. 

As a case in point, take a look at Vodafone (LSE: VOD). The telecoms giant has a larger global presence than some are aware of. It has extensive operations in both Africa and Asia, as well as its business here in the UK. With a dividend yield currently sitting at 7.34%, I think it’s worth a buy.

Why the high dividend yield?

Over the past decade, the dividend yield for Vodafone has averaged around 5%. In the past couple of years, this has been increasing, partly due to the falling share price (the FTSE 100 stock has slumped around 25% this year alone). This boosts the dividend yield because the share price is the denominator when calculating that yield. 

Should you invest £1,000 in Taylor Wimpey right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Taylor Wimpey made the list?

See the 6 stocks

Income investors had already been disappointed by Vodafone in the last year, when a near-10% dividend yield was reduced and the payout was cut by 40%.

And a cut is always a risk. In fact, any FTSE 100 stock with a dividend yield above 10% should sound warning bells for investors in my opinion. At a time when the base rate of interest is at 0.1%, there simply isn’t the need for that big a premium from a dividend-paying firm.

With a yield above 7%, investors do still need to be cautious, but I don’t think we’re going to see another payout cut or cancellation in the short term. 

Checking the fundamentals

Full-year results in May confirmed that the dividend for this year would be paid. If the board was concerned about cash flow, that would have been the perfect time to reduce the dividend, but it wasn’t. Free cash flow actually increased by over 10% to €4.9bn.

Another reason why the dividend is likely to stay is that the firm needs to maintain a strong market capitalisation. This is so that Vodafone can easily raise money if it needs to from the equity markets. Current debt levels stand at an eye-watering €42.2bn.

A firm may not want a very high share price as this hampers the price-to-earnings ratio, but at the same time, it wants a solid share price in order to make other financial ratios look attractive to lenders. By offering an attractive dividend yield, income investors will likely buy into the stock. This won’t stop the share price from falling completely, but will help to stem the slump.

Risk versus reward

I feel that a FTSE 100 stock with a dividend yield at 7% is OK on the risk/reward balance scale. Vodafone isn’t a completely safe business, as shown by the large debt levels. Yet if you want income at a safe firm, then you’re looking at dividend yields around 2%-4%. So from my angle, investing in Vodafone is a risk worth taking.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 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.

More on Investing Articles

Investing Articles

Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce shares have pulled back sharply in the FTSE 100 in recent weeks, leaving this Fool to wonder if he…

Read more »

Investing Articles

Is this the best S&P 500 stock to consider buying in these volatile times?

With bullion prices still rocketing, I think buying the S&P 500's only gold stock is worth serious consideration right now.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Yielding 7.25% but with a P/E of 186x! What’s up with the BP share price?

Harvey Jones thought the BP share price was a brilliant bargain but it's only brought him a world of trouble.…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Down 26% with a 7% yield! Could this little-known FTSE 250 gem make a comeback?

Mark Hartley considers the long-term prospects of FTSE 250 recruiter Page Group. Weak results have sent the price tumbling but…

Read more »

Investing Articles

Analysts are calling Diageo shares a strong buy! Are they mad?

Analysts still have faith in Diageo shares, with 10 of them giving it the highest possible stock rating. Harvey Jones…

Read more »

Investing Articles

Up 17% in 2 days! At last, some good news for those interested in the JD Sports share price

The JD Sports share price jumped after the company said trading was in line with expectations. Our writer considers what…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Is this FTSE 250 retailer a falling knife or a bargain buy?

Our writer Ken Hall has an under-pressure FTSE 250 retailer on his radar. Is it a bargain hiding in plain…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Building a second income stream in 2025 is now more important than ever

With the backdrop of today's economic landscape, Mark Hartley investigates the importance of a second income and how to build…

Read more »