Vodafone (LSE:VOD) has a dividend yield of close to 7% right now. Should I consider adding shares to my portfolio? Let’s take a look at the state of play with the current Vodafone share price to help make my decision.
Vodafone share price on the slide
As I write, shares in Vodafone are trading for 108p. At this time last year, shares were trading for 103p, which is actually a 4% return. This does not tell the whole story, however. Earlier this year, in May, shares were trading for over 140p. Furthermore, at current levels, the Vodafone share price is nowhere near its pre-crash levels of February 2020. It has been on a downward trajectory for a couple of years now. Looking back at historic levels, the shares were trading for over 230p in 2018.
So why did the share price drop for Vodafone? Well it seems that since the introduction of 4G and 5G, the telecoms industry has been poor from an investment perspective. Rising costs, debt, and the emergence of savvy new competitors have hindered traditional telecoms firms.
For and against investing
Despite the share price drop, the FTSE 100 incumbent still offers a good dividend yield. But is there more to it than meets the eye?
FOR: The FTSE 100 average dividend yield is 3%. Vodafone’s is more than double that at close to 7%. In its year-end results to the end of March, Vodafone reported operating cash flow from operations of €3.1bn. It paid €2.4bn of this in dividends to investors. Of course, 2020 was a tough year due to the pandemic. If cash flow returns to pre-pandemic levels, I think the payout looks sustainable for the short to medium term at least.
AGAINST: Vodafone’s debt levels do concern me. In fact, I think they have weighed down the Vodafone share price despite its dividend yield. Last year, debt totalled €41bn, up from €27bn in 2019. Despite action taken by management to reduce this debt, rising interest rates means this could become harder. This could result in lower shareholder returns.
FOR: Vodafone’s global reach eases some of my concerns about investing in the company. It is best known as a mobile operator in the UK, but it is also a major broadband and fintech operator throughout Europe and Africa too. This diverse offering and reach offers it some protection against a downturn in performance in one location in my opinion.
AGAINST: The downward trajectory of the Vodafone share price is a concern. Sometimes an above-average dividend yield can signal belief from investors that a payout is not sustainable. If there is a lack of trust, shares are sold, pushing the yield higher and share price lower. Vodafone does have a history of cutting the dividend too, which puts me off.
My verdict
Overall I will not buy Vodafone shares as an income investment for my portfolio. I believe there are far safer investments out there with an equally attractive dividend yield that would make me a good passive income.
