We recently compiled a list of the 10 Best Dividend Stocks with Over 9% Yield According to Analysts. In this article, we are going to take a look at where Vodafone Group Public Limited Company (NASDAQ:VOD) stands against the other dividend stocks with over 9% yield.
The ongoing debate between dividend yields and dividend growth has left investors split on this strategy. Although high yields can be tempting, excessively high yields can be concerning from the start. Investors are often warned against yield traps, as extremely high yields can indicate potential financial issues within the company. Investors may require a higher return to offset the increased risk associated with the investment. According to analysts, the best dividend stocks aren’t necessarily those with the highest yields. They recommend that investors look beyond just the yield and focus on stocks with reliable dividends, purchasing these stocks when they are undervalued. Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
Does this mean investors should steer clear of high yields? While the general consensus might lean towards this, the real answer depends on the company’s fundamentals. It’s important to note that high yields aren’t necessarily a negative indicator. In fact, dividend yield becomes quite significant when investing in dividend stocks. It is a key factor as it shows how much income an investor can expect to earn from dividends compared to the stock’s price. However, factors such as the company’s cash flow generation, payout ratio, and dividend growth also need to be taken into account to fully benefit from high yields. If these metrics are strong, then stocks with high yields can also be worth considering.
Read Also Best Dividend Growth Stocks to Buy and Hold Now and 10 Best Dividend Aristocrats with Over 3% Yield.
Some reports have highlighted the long-term benefits of high-yield stocks, noting that as dividend yields increase, returns tend to rise while risk decreases. Hartford Funds recently did detailed research on this by taking annualized standard deviation into account. Standard deviation measures the volatility of a portfolio’s total returns, with a higher standard deviation indicating greater historical volatility. According to the report, from December 1969 to March 2024, high-dividend portfolios delivered an annualized return of 12.3%, mid-dividend portfolios 10.5%, and low-dividend portfolios 9.7%. The annualized standard deviations for these portfolios were 14.1%, 16%, and 20.8%, respectively.
In addition, a company’s dividend payout ratio is a crucial indicator of its ability to adjust its dividend policy. Firms that either just cover their dividends or allocate most of their earnings to dividends might face risks from competitive pressures, as their cash flow may be inadequate for operational needs. Companies with high payout ratios could experience slower future growth which may impact both share price appreciation and dividend increases.
Nuveen examined the performance of companies with high payout ratios from December 2003 to December 2023. According to the report, stocks with the highest payout ratios have not been the strongest performers over the long term historically. Among companies that have paid dividends in the past 20 years, those with medium and medium-high payout ratios have generally outperformed. We also think these attributes make a strong case for including companies with robust balance sheets and solid fundamentals for future dividend investment in a portfolio.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 9% as of August 12. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. They either stopped or reduced their dividend payments in 2020 due to the pandemic or because they were facing financial difficulties. The stocks are ranked in ascending order of their upside potential, as of August 12.
We’ve also mentioned the hedge fund sentiment for each stock using Insider Monkey’s Q1 2024 database. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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Vodafone Group Public Limited Company (NASDAQ:VOD)
Upside Potential as of August 12: 26.9%
Dividend Yield as of August 12: 10.24%
Vodafone Group Public Limited Company (NASDAQ:VOD) is a British multinational telecommunications company. It operates in expanding markets where it has solid positions and significant local scale. The company maintains a sustainable and predictable financial profile and benefits from strong structural drivers in Vodafone Business, Africa, and its investment portfolio. The stock has declined by over 71% on the Nasdaq exchange over the past decade as the board worked to stabilize the global giant. However, it seems the worst may be behind, with the stock rising nearly 7% since the beginning of 2024 and achieving a modest 12-month return of 2.22%.
Despite surging this year, Vodafone Group Public Limited Company (NASDAQ:VOD)’s recent earnings fell short of expectations. First-quarter revenues increased by 2.8% year-over-year to €9.04 billion ($9.68 billion), but progress has been uneven. While growth in Africa and Turkey was positive, it was offset by a slowdown in Europe and declining sales in the company’s crucial German market. This pattern has persisted for years and is commonly seen in large companies with diverse interests. Net margins have also been inconsistent. That said, it’s not all bad news. Shares are trading at a forward P/E multiple of 14.62x, making it relatively affordable. In addition, the company recently announced a share buyback program worth up to €500 million ($536 million).
Vodafone Group Public Limited Company (NASDAQ:VOD) has persisted in its investment in innovative practices. Recently, in collaboration with Qualcomm Technologies, Inc. and Xiaomi, it successfully tested a new 5G technology in Germany and Spain. This technology achieved download speeds nearing 1.8 gigabits per second (Gbps) using a new smartphone. The enhancement in speed and data throughput is expected to boost network capacity, freeing up additional bandwidth at mobile sites and improving the overall customer experience. The company currently offers a semi-annual dividend of $0.468 per share for a dividend yield of 10.24%, as of August 12.
Insider Monkey’s database of Q1 2024 indicated that 22 hedge funds held stakes in Vodafone Group Public Limited Company (NASDAQ:VOD), compared with 24 in the previous quarter. These stakes are worth over $172.6 million in total.
Overall VOD ranks 5th on our list of the best dividend stocks with over 9% yield. While we acknowledge the potential of VOD as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than VOD but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.