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Vodafone shares: a rare chance to earn an exceptional passive income stream?

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Vodafone (LSE:VOD) shares sport a dividend yield of 8.2%. That’s far higher than the majority of FTSE 100 stocks, and it means the company looks like an attractive investment opportunity for my passive income portfolio.

However, the company’s shares have fallen considerably in recent years. On a 12-month basis, the Vodafone share price has slumped 22%, and over five years it’s down 53%.

So, does the sell-off present a rare opportunity to earn massive dividend income? Let’s explore.

A market-leading dividend

Although the company’s dividend payments aren’t guaranteed, Vodafone has a track record of rewarding shareholders with distributions during times of economic turbulence. It continued to pay dividends during the 2020 coronavirus stock market crash and the 2008 financial crisis. However, it’s notable that the business slashed its dividend by 40% in 2019.

What’s more, dividend cover looks fragile at only 0.8 times earnings. Unless the company’s revenue improves, this suggests it will have to tap into its cash reserves or sell assets in order to meet its dividend commitments. Accordingly, it’s certainly not impossible that the payouts might come under threat.

That said, dividend cover has been lower in the past but the company continued to issue payouts. Since the cut in 2019, I think the distributions are on a more sustainable footing, particularly if earnings exceed expectations. While not without risks, on balance, the dividend still looks appealing today.

The outlook for Vodafone shares

The Vodafone share price is trading near a 25-year low, suggesting this is a rare investment opportunity. Perhaps the huge slump is unsurprising given net debt remains uncomfortably high and the company’s European revenue continues to shrink, declining 1.1% in Q3.

However, the firm’s operations in Africa show much more promise. Revenue in the continent expanded 3.5% in Q3, supported by higher data usage and robust demand for financial services.

In addition, it’s good to see the company attract significant institutional interest recently. The US telecoms business Liberty Global acquired a stake of nearly 5% in Vodafone worth £1.25bn. Chief Executive Mike Fries said: “The stock’s cheap — it’s an opportunistic and financial investment“.

Plus, the group’s largest shareholder e&, a UAE telecoms operator formerly known as Etisalat Group, upped its shareholding to 14% last month.

After all, Vodafone continues to make important steps toward repairing the balance sheet. The most recent announcement is a plan to shed 1,000 jobs in Italy, equating to 20% of its workforce in the country. If Vodafone can continue to make efficiency savings without harming growth, this boots the company’s investment appeal.

Finally, the business could be on the cusp of a huge merger agreement with Three, worth an estimated £14.5bn. If a deal materialises, the mobile network operators would have a combined market share of around 30%, allowing the company to benefit from scale in a sector where size matters.

Should I buy?

Vodafone shares face plenty of challenges, but I believe the downtrodden share price compensates for the risks investors face.

I’m worried about the sustainability of the index-beating dividend, but fortune favours the brave. If I had spare cash, I’d devote a small percentage of my portfolio to Vodafone for a potentially massive passive income stream.

The post Vodafone shares: a rare chance to earn an exceptional passive income stream? appeared first on The Motley Fool UK.

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Charlie Carman 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.