Vodafone (LSE: VOD) shares are popular among UK income investors as they offer a high dividend yield. Currently, the FTSE 100 stock sports a trailing yield of 4.9% which is certainly attractive when you consider the best rate you can get on a savings account is around 1.5%.
However, as experienced investors know, theres more to dividend investing than just yield. When investing for income, its also important to look at factors such as dividend coverage in order to determine whether the payout is sustainable, as well as dividend growth to determine whether the payout will grow over time and provide protection against inflation. With that in mind, lets take a closer look at Vodafone shares to see how the dividend stacks up.
Dividend coverage
Dividend coverage (the ratio of earnings to dividends) at Vodafone certainly looks a little worrying, in my view. Last year, the group paid out a dividend of 0.09, yet adjusted earnings per share were only 0.053 cents. This gives a dividend coverage ratio of a low 0.59.
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A ratio under one is risky because it suggests the company isnt generating enough earnings to pay its dividend. In other words, the dividend isnt sustainable. Looking ahead, analysts currently forecast earnings of 0.086 cents and a dividend payout of 0.096 this year, which also gives a dividend coverage ratio under one.
Dividend growth
Dividend growth at Vodafone also concerns me. As a dividend investor, you ideally want to see a consistent track record of growth here. A stock like Diageo is a great example. It has now registered 21 consecutive dividend increases.
In Vodafones case, however, the company actually cut its dividend last year. This isnt what you want as an income investor as your incomes reduced.
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In my opinion, a company that has recently slashed its dividend has minimal appeal from a dividend-investing perspective. There could be further cuts on the horizon.
Risks
Ill also point out that there are a number of near-term threats to Vodafones dividend. Firstly, the company has a significant chunk of debt on its balance sheet. At the end of March, net debt stood at 27bn. Debt repayments always take priority over dividend payments, so this is something to be aware of.
Secondly, I expect the company to spend a substantial amount of cash on 5G network rollout in the years ahead. This capital expenditure could also threaten the dividend payout.
Valuation
Finally, lets take a look at the valuation. Currently, Vodafones forward-looking P/E ratio is 21.1. That looks quite high, in my opinion, given that the group just slashed its dividend by 40%. So I wouldnt be surprised to see the Vodafone share price fall further.
Good dividend stock?
All things considered, I dont see much appeal in Vodafone from a dividend-investing perspective. If youre looking for income, I think there are much better dividend stocks to buy right now.
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