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The FTSE 100’s filled with dividend stocks and income opportunities. In fact, 99 of the 100 companies inside of the UK’s flagship index offer investors passive income. And the five largest yields right now are coming from Phoenix Group Holdings (10.3%), M&G (9.2%), Legal & General Group (8.8%), Taylor Wimpey (8.4) and Vodafone (LSE:VOD) at 7.7%.
Combined, this basket of five dividend stocks offers an average yield of 8.9% – almost triple the FTSE 100’s current level of payout. And with exposure to the financial services, insurance, construction and telecommunications industries, it appears to be a fairly diversified mini-income portfolio.
So is now the time to maybe snap up these dividend stocks while the yields are still high?
Yield vs risk
As exciting as earning a near-9% dividend yield sounds, this high level of payout’s usually attached with considerable risk. After all, a dead-cert dividend is often jumped upon by investors almost immediately. And the high volume of buying activity pushes up the stock price and drags down the yield. So when yields are nearing double-digit territory, that usually means investors are being cautious of a looming threat.
Digging deeper
Let’s zoom in on Vodafone. Over the last 12 trailing months, investors have earned around 5.68p in dividends per share after converting from euros. Compared to the current share price of 74.4p, that gives a yield of 7.7%.
And when looking at the price-to-earnings ratio, Vodafone shares don’t exactly appear to be very expensive, trading at a 9.2 earnings multiple. So why aren’t more investors jumping on board this opportunity?
The answer lies in Germany. The company’s core market is proving problematic, with many customers switching to cheaper competitors as Vodafone continues to hike prices. Pairing this with a recent law change that prevents landlords from bundling cable TV into tenancy charges, revenue from Germany has shrunk by 6.4% in its third quarter ended in December.
That’s more than the 6.2% loss in the previous quarter. And even when removing the impact of this law change, sales are still heading in the wrong direction at an accelerating pace.
Considering Germany’s responsible for a third of Vodafone’s top line, this is a serious problem. Management’s actually warned of an incoming impairment charge to its German business in the upcoming May results.
What does this mean for dividends?
Besides the disappointing results in Germany, Vodafone’s business has some bright spots. The UK market appears to be back on track with its upcoming merger with Three, which is expected to spark fresh growth in the enterprise. Meanwhile, its M-Pesa fintech mobile payments platform continues to deliver robust growth in the African markets.
Sadly, this progress appears insufficient to maintain shareholder payouts. And management’s subsequently slashed dividends in half. Instead of paying €0.45 per share every six months, Vodafone shares will now only offer €0.225 per share. And when converted into pounds at the current exchange rate, the yield isn’t 7.7% but rather 5.1%.
All things considered, management seems to be taking the necessary steps to right the ship. But for now, Vodafone shares will be staying on my watchlist. The other stocks on this list also have their challenges. Before investing, be sure to do plenty of research to decide whether the potential reward’s worth the risk.
