Buying 500 Vodafone shares could generate a passive income of…

Vodafone (LSE:VOD) has been a dividend favourite for some investors for a long time. From 2020 to late 2024, the dividend yield ranged from around 6% up to over 12%. However, cuts since then have made it a less stand-out pick for passive income potential. Here’s what it could still offer and whether I believe it’s an attractive option to consider.

Recent issues

Let’s start with the risks. Vodafone’s dividend was cut in 2024, primarily due to high debt levels and steep investment costs. In May last year, the management team announced that the dividend per share would be halved, citing a need for sustainable payouts with sufficient flexibility to invest and pay down debt.

As a result, the dividend yield has fallen as the updated lower dividends have been paid out. The yield currently stands at 5.03%.

The business has also struggled with performance in Germany, a key market. This has been due to factors such as competitive pressure, regulatory changes, and pricing actions. Finally, last month, there was surprise news, with CFO Luka Mucic announcing his departure, citing the challenges in the turnaround and investor restlessness.

Income potential

It isn’t all bad news, something that’s shown by the 5% rally in the stock over the past year. As far as the dividends go, I’m not overly concerned about the cut. As the CEO highlighted at the time, the rebased dividend level is more sustainable, and there’s an ambition to grow it over time.

Sustainability is a key factor when it comes to income. After all, I’d rather own a stock yielding 5% that looks reliable for the coming years than one with a 10% yield that’s showing all kinds of red flags.

The dividend cover is now close to 1, which means the current earnings almost cover the dividend. If the payout hadn’t been reduced, the business would have been under serious financial pressure to pay out the money, hurting cash flow.

Therefore, I think it was a smart long-term move, something that should help the business going forward. It also provides more funds to invest in new operations, which should generate more profits and boost income payments in the future. It’s a case of when accepting less today can become receiving more tomorrow!

Talking numbers

Right now, 500 Vodafone shares would cost £379.30. This could pay out £19.07 over the coming year. If an investor bought 500 more each month for the next year, the total passive income from this holding could rise to £229. Of course, future dividends aren’t guaranteed. The recent issues represent ongoing risks that could mean the dividend gets cut again in the future. But I feel it’s a more sustainable income option now, so it could be worth considering by investors.

The post Buying 500 Vodafone shares could generate a passive income of… appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.