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vodafone (LSE:VOD) shares boast a market-leading dividend yield of just under 8.4%. With huge shareholder distributions on offer, I’m eyeing the telecom titan for my portfolio this year.
Let’s explore how you could earn over £1,200 per year in passive income by investing in the FTSE 100 company.
A high dividend stock
Vodafone’s share price is currently 92 pence. In 12 months, the stock has fallen 23%, putting the dividend yield well above the Footsie average.
Today 300 shares would cost me £276. Let’s say I keep buying this many shares every week for the course of a year. In total, you would pay £14,352 for 15,600 shares.
I could buy all the shares through a Stocks and Shares ISA, as the lump sum fits my £20,000 annual limit. This is useful as any income received within the ISA wrapper would not be subject to dividend taxes.
At the current dividend yield, my shareholding would produce an annual passive income stream of £1,202.70, just over £100 each month.
Then you could reinvest the dividends in more Vodafone shares. This would allow me to benefit from a long-term combined effect.
Reasons to be optimistic
After lagging the performance of the FTSE 100 for years, the latest financial results offer some glimmers of hope.
During the first half of fiscal year 23, Vodafone reported a revenue increase of 2% to €22.9 billion, driven by service revenue growth and increased equipment sales. Operating profit also increased by 12% to €2.9 billion.
Much of the progress was fueled by its success in Africa. The company established itself as a leading technology provider on the continent by connecting more than 170 million Africans to a range of mobile and lifestyle services.
In addition, the company is contemplating merging its UK operations with Three UK. This deal would make the combined team Britain’s second largest mobile network operator. With 27 million customers, it would only be surpassed by Virgin Media O2’s 32 million.
The proposed merger would give the company the scale to accelerate its full 5G rollout and expand its broadband connectivity. If it comes to fruition, I think the merger could provide positive momentum for the share price.
risks
However, there are also significant obstacles to growth. Unlike Africa, Vodafone has stagnated in Europe. This is largely due to a 1.1% decline in service revenue in its largest market, Germany.
Also, the company’s debt levels make for uncomfortable reading. With €67.5 billion in long-term debt, the debt/equity ratio stands at around 116%. This has forced Vodafone to pursue aggressive cost-cutting measures to save $1.1bn by 2026, including its biggest round of layoffs in five years.
Furthermore, the company currently lacks clear direction and leadership. Under pressure from a 40% stock price collapse during his tenure, former chief executive Nick Read resigned on December 31. Chief Financial Officer Margherita Della Valle is tasked with stabilizing the ship as interim CEO.
My Passive Income Portfolio
While not without risk, I think Vodafone could have better days if it can reduce its debt and streamline its business.
If I had some extra money, I would invest in the stock to aim for a stream of regular passive income.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
