The coronavirus crash has been a difficult time for income investors. Many companies have paused their dividends in order to hoard cash. Although I think most of these payouts will return, today I want to look at a FTSE 100 dividend stock whose payout has remained stable this year.
I think this company — which offers a yield of 7% — is likely to be a reliable income play for the foreseeable future. I’m also going to take a look at a slightly riskier choice which currently offers a 10% yield.
I’d buy and forget this FTSE 100 dividend stock
My first pick is telecoms giant Vodafone Group (LSE: VOD). In the UK we tend to think of Vodafone as a mobile operator (which it is). But the group is now also one of Europe’s largest fixed-line network operators, providing broadband to more than 25m people.
There’s also a second part to this business which I think looks attractive from a long-term growth perspective. Vodafone is one of the largest mobile operators in Africa. Its Vodacom business is based in South Africa and covers markets such as Tanzania, Mozambique, Nigeria and Kenya. Vodacom had 82m data users as of 30 June and handled 5bn mobile money transactions during the last quarter.
Vodafone has long been a popular FTSE 100 dividend stock, but the firm’s income reputation was dented last year when new chief executive Nick Read decided to cut the payout by 40%.
I think Read’s decision was the right one. Although the group generates a lot of cash, some of this is needed to fund continued network investment and debt reduction.
However, in my view, the current payout of nine euro cents per share looks very safe indeed. It gives the stock a yield of around 7% at current levels — well above the market average.
I’ve been impressed by Read’s progress so far. Recent results have looked very reassuring to me. Vodafone is certainly a dividend stock I’d be happy to buy today and hold in a long-term income portfolio.
Is this 10%-yielder a better choice?
As a general rule, stocks offering very high dividend yields of more than about 7% usually carry extra risk of a dividend cut. But, in some cases, these payouts are sustainable, perhaps where the market is uncertain about the prospects for a new arrival.
I think that might be true for my second pick, Airtel Africa (LSE: AAF). This FTSE 250 group is Africa’s second-largest mobile operator and floated on the London Stock Exchange in June 2019.
Although this is a large, well-established business — operating profit topped $900m last year — it’s new to UK investors. The majority of shares are also still controlled by the founding Bharti family. I think these factors could account for the stock’s low valuation.
I’m still researching this stock, but I can see the group’s profit margins are similar to those of Vodafone. Also, like Vodafone, Airtel Africa’s dividend was comfortably covered by the group’s free cash flow last year, a key test of affordability.
I don’t think Airtel quite offers the security of a FTSE 100 dividend stock. But with a forward yield of about 10%, I think these shares may be worth considering. I’ve added them to my watch list for further research.