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There are some tempting dividend shares on the Footsie proper now. However large dividend yields can lead us into hazard. And I actually suppose there are some I ought to keep away from.
Lengthy-term disappointment
Vodafone (LSE: VOD) is one, regardless of a tasty-looking 7.8% yield. I’m turning away at a time when the corporate is on the ultimate €0.5bn tranche of a €2bn share buyback programme.
For years, Vodafone was paying out foolish large dividends whereas watching its share worth slide. The corporate lastly noticed some sense and slashed the annual payout for 2025 in half.
A share worth chart may not carry lots of data. However it does present what the market thinks of a inventory. And it doesn’t seem like the market is but satisfied of Vodafone’s turnaround.
Watch the money
Vodafone has some issues I like lots. The rebased dividend, coupled with forecasts, recommend cowl by earnings of shut to 2 occasions by 2027. That’s an enormous enchancment from the years when Vodafone couldn’t get near cowl.
And the buybacks present an organization awash with money, which is unquestionably what dividend buyers search for. I additionally know I may very well be making a mistake by avoiding Vodafone shares — this actually may very well be the shopping for alternative I’ve been ready for.
The difficulty is, an enormous chunk of that money comes from the €8bn disposal of Vodafone Italy. And what the corporate will seem like when it completes its Three merger, anticipated within the subsequent few months, is a significant uncertainty.
In February’s buying and selling replace, CEO Margherita Della Valle stated that by then “we could have absolutely executed Vodafone’s reshaping for development“. I danger getting the timing fallacious. However I simply don’t see the plain cell phone enterprise going anyplace thrilling. I’d wish to see the long-term form first.
Make up my thoughts
I can’t take a look at Vodafone with out serious about BT Group (LSE: BT.A) and its forecast 4.9% dividend yield. I’ve been on the fence about this one for a while, because it’s been a dependable dividend payer for a few years.
Once more, although, the board has watched over a long-term share worth slide. And we’ve seen the identical lack of dividend cowl by earnings that trashed the Vodafone share worth.
However then got here a key occasion in mid-2024, when BT informed us it had handed its peak broadband capital expenditure. The share worth began climbing once more, up over 50% prior to now 12 months.
Elephant nonetheless within the room
Like Vodafone, we even see forecasters anticipating future dividends to be lined. I might overlook the whole lot else, take a look at the dividend monitor document, and simply purchase the shares and pocket the money yearly. I do suppose that may very well be a worthwhile method, and buyers who purchase in the present day might do very nicely from it.
However it will imply ripping up considered one of my key investing guidelines, one which’s served me nicely. I’ve at all times prevented firms with massive quantities of debt.
BT’s web debt stood at £20.3bn at 30 September, which is considerably greater than its market capitalisation. I simply can’t ignore that, so I’m lastly off the fence and I’m not shopping for.
