My funding fashion has developed over many years, however I principally hunt for reasonable shares and chunky dividend yields. However the issue with being a cut price hunter is that giveaways are onerous to seek out.

Nonetheless, I hold sifting by the FTSE 100, looking for undervalued shares. I significantly get pleasure from unearthing low cost Footsie shares, as I see the UK market as undervalued in historic and geographical phrases. Moreover, virtually all FTSE 100 member firms pay dividends to shareholders.

Dividends could be dicey

After firms pay out dividends, their money piles are smaller. And repeatedly paying excessively beneficiant dividends can weaken an organization’s steadiness sheet. This may trigger solvency issues at some companies, however firms often reply by slashing future dividends.

As future dividends are usually not assured, they are often axed at brief discover. Thus, I pay shut consideration to dividend histories, searching for indicators of potential pitfalls forward.

Additionally, very excessive dividend yields can warn of future hassle. Specifically, historical past reveals that double-digit money yields hardly ever final. Both share costs rise and yields fall — or dividends get reduce, producing related outcomes.

The FTSE 100’s highest yielders

For instance, listed below are the FTSE 100’s 5 highest-yielding shares:

*All figures as of 29 March

Disclosure: my spouse and I personal shares in 4 of those 5 ‘dividend dynamos’ in our household portfolio, excluding Taylor Wimpey. We purchased these shares for his or her bumper dividend yields. For now, we reinvest this money into but extra shares, thus boosting our future returns.

Trying on the first three shares above, I see their dividend payouts as fairly secure. These three asset managers generate billions of surplus capital from their working companies, enabling them to comfortably afford projected money returns. Then once more, one among these shares supplies an essential lesson in dividend risks.

Risky Vodafone

For me, Vodafone Group (LSE: VOD) shares turned a traditional ‘value trap’. We purchased this high-yielding inventory in December 2022, paying 90.2p per share. Inside two months, the share price had leapt above 102p, nevertheless it’s been downhill ever since. Over one yr, this inventory is up 5.8%, nevertheless it has slumped 37.7% over 5 years.

One downside for Vodafone is that its revenues are both stagnating or growly slowly in its main European markets, together with Germany and the UK. Sadly, sturdy development in rising markets has didn’t offset the group’s long-term earnings decline. On the peak of the dotcom bubble that burst in 2000, Vodafone was Europe’s largest listed firm. Immediately, it’s price a fraction as a lot.

One massive downside for Vodafone shareholders arrived in Might 2024, when the corporate introduced that its yearly dividend would halve from 2025 onwards. Having been €0.09 (7.5p) a yr for years, 2025’s payout will plunge by 50%. No marvel the shares have fallen because the lack of this revenue.

Regardless of this dividend setback, I stay a fan of CEO Margherita Della Valle, who is popping this tanker round by gross sales of non-core property and tie-ups with different telecoms gamers. Therefore, I’ll hold our Vodafone holding for now!