Are Vodafone shares a no-brainer buy for their huge 10% dividend yield?

I love a juicy dividend yield, and Vodafone shares offer a fat one right now. But will it be paid, and what does the long-term look like?

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Vodafone (LSE: VOD) shares offer the biggest dividend on the FTSE 100 right now. Forecasts put the yield close to 10.5%. And an income of more than 10% per year looks like a no-brainer buy, don’t you think?

So why have investors not snapped up Vodafone shares and pushed the price up and the dividend yield down?

Well, it looks like they’ve been doing the opposite, judging by the share price chart.

Share price slide

Vodafone shares have slid in the last month, taking them down 60% in the past five years.

We might think stock market investors don’t want to pocket a fat 10% a year from their shares. Or, I think more likely, they don’t think they’re going to get it.

I mean, if I thought that 10% was guaranteed, I’d sell all my shares and put the whole lot into Vodafone. But people are clearly not doing that.

It’s perhaps ironic that the latest share price dip has come after Vodafone did something that I think is very much right.

Wake-up call

For years, I’ve said Vodafone has been destroying shareholder value. But we had a big wake-up call in May.

At fiscal year results time, new boss Margherita Della Valle said: “Our performance has not been good enough. To consistently deliver, Vodafone must change.”

So what needs to change?

You know the way Aviva looked a bit bloated a few years ago, with its global operations not working together efficiently? After restructuring, it looks a lot leaner and fitter now.

I reckon Vodafone needs the same kind of shake-up.

Why sell?

We’ll see how the details pan out. But if the Vodafone board has started on its path, why are investors selling up?

We come back to the dividend, which I think has been a core part of the firm’s failure as an investment.

The thing is, Vodafone has, for years, been paying dividends that have not been justified by earnings. At the same time, the firm has been racking up debt.

It seems shareholders were happy to pocket the annual handout without worrying too much about where it was coming from. And it looks like they now fear the flow of easy cash might be set to dry up.

Dividend cuts

So will the Vodafone dividend be cut? We don’t know yet. And forecasts still show it up around the 10% level for the next few years. But it just doesn’t look affordable to me, not for a company with a new focus on profit and efficiency.

I strongly suspect the dividend could be rebased as part of the new plan.

Saying that, I reckon Vodafone shares might actually be good value now. We’re looking at a forecast price-to-earnings (P/E) ratio of only about 11.

Long-term view

And that could make the shares a nice long-term buy for those who see the firm coming through the next few years in better shape.

In fact, I think Vodafone could still be a top long-term dividend buy. I just wouldn’t bank on that 10%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Aviva Plc. 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.

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