With a forecast dividend yield nearing 11%, at the time of writing, I can see why investors seeking passive income might gravitate towards Vodafone (LSE: VOD) shares. Even so, I think there are far better alternatives.
Too good to be true
At first glance, it seems absurd to shun the connectivity and digital services provider — it’s easily the highest-yielding stock in the FTSE 100 right now. By comparison, the index itself yields ‘just’ 3.8%.
However, it’s because this yield is so big that I’m reaching for my bargepole. You see, an eye-watering dividend stream is usually a sign that the market has concerns over how a company is performing. This can lead to a wave of selling which pushes the share price lower and the yield even higher (they are negatively correlated).
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For me, the biggest issue here is that Vodafone still has far too much long-term debt on its balance sheet. Yes, assets are being sold to address this but not at a rate I’d like. And the longer this burden remains, the more payouts are at risk.
Low cover
Based on analyst estimates, Vodafone will be unable to meet this year’s total dividend with expected profit. Now, the shortfall isn’t huge and the situation is projected to improve slightly in FY25. But it hardly inspires confidence. I look for dividend cover of at least 1.5 times. Two times is ideal.
For balance, the shares now change hands for a little less than 10 times forward earnings. That’s arguably cheap relative to the UK stock market as a whole. So if general sentiment continues to improve at the rate it has over recent weeks, Vodafone could deliver a tidy capital gain in addition to income in 2024.
Notwithstanding this, a horrible performance over the last five years makes the opportunity cost of tying my cash up here too big to contemplate.
Better track record
One stock I’d pick over Vodafone for passive income for 2024 would be consumer goods giant Unilever (LSE: ULVR).
Again, that might seem a bit odd. The Marmite-maker’s share price has been in similarly poor form this year. However, if I assume this momentum will eventually reverse (and I’m inclined to think it will as the cost-of-living crisis abates), there’s an argument for banking the passive income in the meantime.
But it goes a bit deeper than that. Unilever has a better track record of annually hiking its payouts. To me, that sends a signal that this company is resilient. By contrast, Vodafone’s record over the last few years has been unsurprisingly woeful.
On sale
So what are the potential downsides to backing Unilever right now? To me, there are two that jump out.
First, Unilever stock yields 4.0%. That’s higher than the index but a lot lower than over at Vodafone (if we assume the latter isn’t cut).
Second, there’s a possibility that some shoppers won’t return to branded goods. I think this is unlikely. History shows that memories of tough times quickly fade and habitual spending returns.
And with Unilever’s shares now cheaper than they’ve been in years (a forecast P/E of under 16 for FY24), I think the investment case here is more attractive.
Now I just need to find some cash to buy the stock.
