Dividend shares: is Vodafone’s 6.7% yield safe?

Vodafone (LSE: VOD) is one of the most attractive dividend shares in the FTSE 100. At the time of writing, shares in the telecommunications giant offer a dividend yield of around 6.7%. That is more than double the FTSE 100 market average of approximately 3.1%. 

However, I am in no rush to add this stock to my portfolio as an income investment. I am worried about the sustainability of the company’s dividend in an environment where telecoms groups worldwide have to spend increasingly large sums on technology to attract customers. 

Is Vodafone one of the best dividend shares?

Vodafone’s dividend has always been one of the most generous in the FTSE 100. But it comes at a cost.

In its 2021 financial year, the firm paid out €2.4bn in dividends to investors. To put this figure into perspective, the group paid €2.1bn in interest on debt for the year. It also spent around €12.4bn on capital projects and other investments. 

Vodafone’s financials show that the company’s current dividend is covered by free cash flow. At this point in time. They also show that the group is paying as much interest on its mountainous €40.5bn debt pile as it is returning to investors. In my opinion, this is the most worrying figure. 

These numbers suggest that Vodafone does not have much wiggle room when it comes to shareholder returns. If the cost of servicing its debt rises only marginally, it could put massive pressure on the company’s cash flows and potentially lead to a dividend cut. 

Future growth

I have been worried about Vodafone’s debt and the impact it may have on the company’s position as one of the market’s best dividend shares for some time. However, the enterprise has continually surprised me. 

This may continue. It recently acquired Liberty Global’s European assets, which are already yielding results. Last year, the group managed €500m in savings from the new division, boosting its cash generation. 

Vodafone also recently spun off its European tower assets in the Vantage Towers IPO. This deal helped reduce debt further. And while the company is spending heavily to attract customers, they are staying with the organisation, bolstering its cash flow position. 

So, the company does have levers it can pull to reduce the stress on its balance sheet and free up cash flow. This is why I am not 100% sure that Vodafone will have to cut its dividend again at some point in the future. I think there is a chance the payout could fall if interest rates rise and the firm has to keep spending on new infrastructure, but there is no guarantee. 

Some investors may be comfortable owning the stock in their portfolio of dividend shares considering the above. However, I think Vodafone’s future is too uncertain. Therefore, I would not buy the shares for income or growth, no matter how high the dividend yield.