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There are some tempting dividend shares on the Footsie proper now. However huge dividend yields can lead us into hazard. And I actually assume 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 won’t carry quite a lot of info. But it surely does present what the market thinks of a inventory. And it doesn’t appear like the market is but satisfied of Vodafone’s turnaround.
Watch the money
Vodafone has some issues I like so much. The rebased dividend, coupled with forecasts, counsel cowl by earnings of shut to 2 instances 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 traders search for. I additionally know I might be making a mistake by avoiding Vodafone shares — this actually might be the shopping for alternative I’ve been ready for.
The difficulty is, a giant chunk of that money comes from the €8bn disposal of Vodafone Italy. And what the corporate will appear 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 totally executed Vodafone’s reshaping for progress“. I danger getting the timing unsuitable. However I simply don’t see the plain cell phone enterprise going wherever 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 interested by 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% previously 12 months.
Elephant nonetheless within the room
Like Vodafone, we even see forecasters anticipating future dividends to be lined. I might overlook every part else, take a look at the dividend monitor document, and simply purchase the shares and pocket the money yearly. I do assume that might be a worthwhile strategy, and traders who purchase at the moment might do very properly from it.
However it will imply ripping up certainly one of my key investing guidelines, one which’s served me properly. I’ve at all times averted firms with massive quantities of debt.
BT’s internet 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.
