12% dividend yield! Will this FTSE 100 share keep paying?

A double digit dividend yield is unusual for a FTSE 100 share. Yet this one yields 11.9%. Our writer weights some pros and cons of owning 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.

Chalkboard representation of risk versus reward on a pair of scales

Image source: Getty Images

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.

What is a good yield for a blue-chip FTSE 100 share?

At the moment, the average is around 4%. So the 5% of Barclays or 8% of Imperial Brands may be considered good.

But personally I think a good yield is one that looks likely to remain at an attractive level.

One share I own now has a yield of 11.9%. Yet it is a FTSE 100 business with a well-known brand and customer base stretching into the hundreds of millions. Such a high yield is often a red flag for investors. Should that be the case here too?

Double-digit dividend yield

The share in question is telecoms giant Vodafone (LSE: VOD).

Vodafone’s share price has collapsed 59% over the past five years. That partly explains why the yield has now reached the level it has.

Still, a big decline in share price and unusually high yield are often hallmarks of a business in trouble. Could that be the case for Vodafone – and what might that mean for the dividend? After all, the company has past form in cutting its dividend. That happened in 2019.

Challenging environment

I do think Vodafone faces some difficult choices.

It has a net debt running into tens of billions of euros. It has been shrinking its business in the past couple of years by selling off operations in some countries. That may well reduce revenues and profits. Telecoms is also an expensive sector in which to operate, thanks to the high costs of building networks and paying for licenses.

Set against that, I think the business has quite a lot going for it.

That massive customer base, well-recognised brand, and a leading position in many markets are all positive attributes. It is profitable and cut net debt by around a fifth last year. I reckon it has the makings of a business that can generate sizeable profits for years to come.

Dividend sustainability

Is that enough to keep paying out the dividend?

Vodafone could cut its dividend by a quarter or even half and still have a yield significantly higher than the FTSE 100 average.

But it could also maintain its dividend at the current highly lucrative level, in my view.

A new chief executive who started this year has already had the chance to cut the payout but has not done so. The falling net debt weakens one of the key arguments to cut the dividend, as a healthier balance sheet could make it easier for the FTSE100 giant to maintain its payout.

Selling businesses has raised cash for Vodafone but its possible impact on profits is a concern to me. However, I think the company may well maintain its monster dividend. If I had spare cash to invest at the moment, I would be happy to buy more Vodafone shares for my portfolio.

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.

C Ruane has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. 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

Bearded man writing on notepad in front of computer
Investing Articles

£20k to invest for a decade? These exchange-traded funds (ETFs) could turn that into almost £100k!

Exchange-traded funds (ETFs) can deliver spectacular long-term returns, as these US- and UK-listed vehicles have already shown.

Read more »

Dividend Shares

2 infrastructure dividend shares with yields of 7% or higher

Jon Smith outlines two dividend shares from a sector that boasts high yields at the moment -- but there are…

Read more »

Investing Articles

2 FTSE 100 growth shares that could shine in 2025

Paul Summers picks out two FTSE 100 growth shares that, despite performing very differently in 2024, he thinks could end…

Read more »

Investing Articles

My top 2 stock market predictions for 2025

This writer didn’t receive a crystal ball for Christmas, but he still has a couple of stock market predictions for…

Read more »

Investing Articles

3 companies that could emulate Nvidia stock’s success in 2025

Nvidia stock has generated market topping growth over the past two years. But investors need to be asking themselves, who…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s my plan for maximising the returns from my Stocks and Shares ISA in 2025

After a good 2024, Stephen Wright has two key ideas he wants to implement in his Stocks and Shares ISA…

Read more »

Investing Articles

3 key FTSE 100 stock updates to watch for in January

My 2025 investing focus is on key FTSE 100 stocks in key sectors, and we won't have very long to…

Read more »

White female supervisor working at an oil rig
Investing Articles

Why the BP share price fell 16% in 2024

Oil prices have been falling since April causing BP shares to do the same. But Stephen Wright thinks there’s much…

Read more »