There are some tempting dividend stocks on the Footsie right now. But big dividend yields can lead us into danger. And I really think there are some I should avoid.
Long-term disappointment
Vodafone (LSE: VOD) is one, despite a tasty-looking 7.8% yield. I’m turning away at a time when the company is on the final €0.5bn tranche of a €2bn share buyback programme.
For years, Vodafone was paying out silly huge dividends while watching its share price slide. The company finally saw some sense and slashed the annual payout for 2025 in half.
A share price chart might not carry a lot of information. But it does show what the market thinks of a stock. And it doesn’t look like the market is yet convinced of Vodafone’s turnaround.
Watch the cash
Vodafone has some things I like a lot. The rebased dividend, coupled with forecasts, suggest cover by earnings of close to two times by 2027. That’s a huge improvement from the years when Vodafone couldn’t get close to cover.
And the buybacks show a company awash with cash, which is surely what dividend investors look for. I also know I could be making a mistake by avoiding Vodafone shares — this really could be the buying opportunity I’ve been waiting for.
The trouble is, a big chunk of that cash comes from the €8bn disposal of Vodafone Italy. And what the company will look like when it completes its Three merger, expected in the next few months, is a major uncertainty.
In February’s trading update, CEO Margherita Della Valle said that by then “we will have fully executed Vodafone’s reshaping for growth“. I risk getting the timing wrong. But I just don’t see the plain mobile phone business going anywhere exciting. I’d want to see the long-term shape first.
Make up my mind
I can’t look at Vodafone without thinking about BT Group (LSE: BT.A) and its forecast 4.9% dividend yield. I’ve been on the fence about this one for some time, as it’s been a reliable dividend payer for many years.
Again, though, the board has watched over a long-term share price slide. And we’ve seen the same lack of dividend cover by earnings that trashed the Vodafone share price.
But then came a key event in mid-2024, when BT told us it had passed its peak broadband capital expenditure. The share price started climbing again, up over 50% in the past 12 months.
Elephant still in the room
Like Vodafone, we even see forecasters expecting future dividends to be covered. I could forget everything else, look at the dividend track record, and just buy the shares and pocket the cash every year. I do think that could be a profitable approach, and investors who buy today could do very well from it.
But it would mean ripping up one of my key investing rules, one that’s served me well. I’ve always avoided companies with large amounts of debt.
BT’s net debt stood at £20.3bn at 30 September, which is significantly more than its market capitalisation. I just can’t ignore that, so I’m finally off the fence and I’m not buying.
