While the stock market is steadily on the mend, there continues to be several income stocks offering impressive yields. In fact, both Vodafone (LSE:VOD) and Energean (LSE:ENOG) currently offer dividend payouts in excess of 10%!
Considering the average yield is usually around 4% among dividend-paying enterprises, these two firms sound like terrific opportunities for those seeking to build some passive revenue. But is this too good to be true?
Telecommunications potential
With the rollout of 5G infrastructure quietly making progress, Vodafone has found multiple new avenues to explore in an attempt to achieve growth. And, so far, management has hit some decent milestones in the pursuit of becoming Europe’s most advanced 5G network provider through acquisitions and investments.
However, even with these encouraging developments, the group’s balance sheet has a lot of debt weighing it down. In light of rising interest rates, the company has had to undergo some extensive restructuring to try and get its financials back on track.
Management has announced its strategy to navigate the murky waters that lie ahead. And while it’s still too soon to tell, early signs do suggest improvements have started to materialise.
In fact, just earlier this month, Vodafone announced a new 10-year partnership with Microsoft. The goal is to improve the firm’s customer services using AI to minimise costs as well as improve quality for customers. With all parts of Vodafone’s business set to benefit, the group’s long-term potential is exciting.
Sadly, the short term is still filled with uncertainty. Dividends were maintained in the latest results. But if revenue and operating profits continue to fall, then payout cuts may be on the horizon. As such, the impressive 11.1% yield could be a trap, in my opinion.
A bargain oil baron?
Energean’s share price has been under a lot of pressure over the last 12 months. Its market capitalisation has dropped by a quarter versus a year ago despite publishing encouraging results. Development projects continue to progress on schedule while its oil and gas production continues to be in line with its full-year guidance.
As such, the group’s sales and other revenues surged by 93%, reaching $1.42bn. Underlying earnings followed suit. And while net debt increased, overall leverage actually halved on the back of surging profits. With that in mind, the group’s 10.1% dividend yield certainly sounds like a bargain.
Unfortunately, the situation is a bit more complicated. While the financials are currently moving in the right direction, there are growing fears that could quickly change overnight.
Energean’s flagship production sites are located off the coast of Israel. And with the geopolitical conflict in Gaza on its doorstep, there’s understandable concern that production may become disrupted.
So far, that hasn’t been the case. But further escalation of the conflict could quickly change. And with minimal recourse available for management to mitigate the impact of shutting down these sites, current impressive growth could grind to a halt while the war rages on.
Therefore, while Energean’s financials certainly look sufficiently healthy to maintain shareholder payouts, there remains a real danger of disruption that could compromise an investment thesis. For me, the risk is just too high.
