Vodafone (LSE:VOD) has been a dividend favorite for some traders for a very long time. From 2020 to late 2024, the dividend yield ranged from round 6% up to over 12%. Nevertheless, cuts since then have made it a much less stand-out choose for passive revenue potential. Right here’s what it may nonetheless supply and whether or not I imagine it’s a horny choice to think about.

Current points

Let’s begin with the dangers. Vodafone’s dividend was minimize in 2024, primarily on account of excessive debt ranges and steep funding prices. In Might final 12 months, the administration workforce introduced that the dividend per share could be halved, citing a necessity for sustainable payouts with ample flexibility to speculate and pay down debt.

Consequently, the dividend yield has fallen because the up to date decrease dividends have been paid out. The yield presently stands at 5.03%.

The enterprise has additionally struggled with efficiency in Germany, a key market. This has been on account of components similar to aggressive strain, regulatory adjustments, and pricing actions. Lastly, final month, there was shock information, with CFO Luka Mucic saying his departure, citing the challenges within the turnaround and investor restlessness.

Earnings potential

It isn’t all unhealthy information, one thing that’s proven by the 5% rally within the inventory over the previous 12 months. So far as the dividends go, I’m not overly involved in regards to the minimize. Because the CEO highlighted on the time, the rebased dividend stage is extra sustainable, and there’s an ambition to develop it over time.

Sustainability is a key issue in relation to revenue. In any case, I’d quite personal a inventory yielding 5% that appears dependable for the approaching years than one with a ten% yield that’s displaying every kind of pink flags.

The dividend cowl is now near 1, which suggests the present earnings virtually cowl the dividend. If the payout hadn’t been diminished, the enterprise would have been below severe monetary strain to pay out the cash, hurting money stream.

Due to this fact, I believe it was a wise long-term transfer, one thing that ought to assist the enterprise going ahead. It additionally gives extra funds to spend money on new operations, which ought to generate extra income and increase revenue funds sooner or later. It’s a case of when accepting much less at this time can turn into receiving extra tomorrow!

Speaking numbers

Proper now, 500 Vodafone shares would price £379.30. This might pay out £19.07 over the approaching 12 months. If an investor purchased 500 extra every month for the following 12 months, the full passive revenue from this holding may rise to £229. In fact, future dividends aren’t assured. The latest points characterize ongoing dangers that might imply the dividend will get minimize once more sooner or later. However I really feel it’s a extra sustainable revenue choice now, so it may very well be price contemplating by traders.