The FTSE 100 continues to rampage higher. And on Monday it traded above the 7,500-point marker for the first time in two months.
UK share prices are recovering strongly as fears over corporate earnings recede. Yet following earlier weakness in 2022 many top dividend stocks continue to carry enormous dividend yields.
Take Vodafone Group (LSE: VOD), for instance. Its share price has risen by mid-single-digit percentages in 2022. However its dividend yield still sits far above the FTSE index average below 4%.
A dividend hero
| Share price | 121p |
| Price movement in 2022 | 7% |
| Market cap | £33.9bn |
| Forward price-to-earnings (P/E) ratio | 12.6 times |
| Forward dividend yield | 6.2% |
| Dividend cover | 1.3 times |
Vodafone has long been a reliable income stock for dividend investors. Telecoms demand remains broadly constant during economic upturns and downturns. People don’t stop talking because they have less money in their wallet, right? So Vodafone has had both the financial means and the confidence to pay big dividends whatever the weather.
Indeed, Vodafone saw organic service revenues rise 2.5% in the three months to June. This was even better than the 2% increase it recorded in the previous three months and came despite rising economic turmoil in Europe.
Vodafone is also a colossal cash creator. This also gives it extra strength with which to pay large dividend payments. In fact cash generation here continues to defy expectations and in May it hiked its adjusted free cash flows for the current year.
Risks to consider
Now Vodafone’s expensive operations do pose a threat to future dividend levels. Keeping its network switched on and working requires vast amounts of capital. In addition, the company’s aggressive expansion in 5G and broadband also puts pressure on the balance sheet.
Remember that Vodafone still has a massive amount of debt that it needs to pay down. Net debt stood at a colossal €42bn as of March.
What’s more, the projected dividend payment for this year is covered just 1.3 times by anticipated earnings. This is well below the widely regarded security benchmark of two times and above.
Looking to Africa
Still, I believe the steps Vodafone is taking to embrace next-generation technologies will lead to solid long-term profits growth. And this will make the telecoms business a top passive income buy for the long term.
I’m also not underestimating the exceptional growth potential offered by its African operations. Telecoms demand here looks set to boom over the next decade as rising incomes mean product adoption can soar from low starting rates.
The number of customers using its telecoms and mobile money services rose 2.3% and 4.4% respectively in the three months to June.
The Vodafone share price has dropped sharply in recent weeks. This provides a top dip buying opportunity, in my opinion. And particularly so as it’s driven the company’s dividend yield to the stars.