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There are some tempting dividend shares on the Footsie proper now. However large 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 may not carry loads of data. Nevertheless it 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 rather a lot. The rebased dividend, coupled with forecasts, recommend 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 definitely what dividend buyers search for. I additionally know I could possibly be making a mistake by avoiding Vodafone shares — this actually could possibly 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 serious uncertainty.
In February’s buying and selling replace, CEO Margherita Della Valle mentioned that by then “we can have absolutely executed Vodafone’s reshaping for development“. I danger getting the timing fallacious. However I simply don’t see the plain cell phone enterprise going anyplace 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 fascinated with 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 instructed 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 coated. I might overlook the whole lot else, take a look at the dividend observe file, and simply purchase the shares and pocket the money yearly. I do assume that could possibly be a worthwhile strategy, and buyers who purchase at this time might do very effectively from it.
However it will imply ripping up one in every of my key investing guidelines, one which’s served me effectively. I’ve at all times prevented firms with giant quantities of debt.
BT’s web 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.
