Forget buy-to-let! The Vodafone share price is where I’d invest today

The Motley Fool
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Young woman sat at laptop by a window

While buy-to-lets have proven popular among investors in the past, there are a number of FTSE 350 shares which could offer stronger total return outlooks. Vodafone(LSE: VOD), for example, seems to be trading on a low valuation following its share price fall. It has a dividend yield which is almost twice that of the FTSE 100, which suggests that its income potential is high.

At the same time, the prospect of rising interest rates and an uncertain future for the UK economy could mean that the buy-to-let sector becomes less appealing. As such, buying Vodafone, and another dividend share which reported an upbeat update on Tuesday, could be a shrewd move, in my opinion.

Dividend growth potential

The company in question is information technology global professional services provider FDM Group(LSE: FDM). Its trading update for the year to 31 December showed continued strong operational performance, delivering results in line with expectations.

Revenue for the year increased by 5% to £245m, while market demand in all of its operating territories remained strong. It’s also experienced record levels of client engagement and demand and is optimistic for further growth in the current year.

Net profit growth in the 2019 financial year is expected to be 9%. This is due to catalyse the company’s dividend so it has a yield of 4%. If forecasts are met, its dividend payout will have increased at an annualised rate of 36% over the last five years, which suggests that it’s becoming an increasingly appealing income opportunity. As such, FDM Group could deliver improved stock price performance after its decline of 13% in the last year.

Recovery prospects

Also posting a disappointing share price performance over the last year has been Vodafone. The company’s shares are down by over a third during that time, underperforming the FTSE 100 by 23%.

Debt concerns seem to be the main cause of its share price fall. The €19bn acquisition of Liberty Global’s cable networks is expected to lead to further pressure on what is an already highly-indebted balance sheet. And while its management team recently allayed concerns over a dividend cut in the near term, it remains a possibility over the next few years.

Even with a dividend cut, though, Vodafone is likely to continue to offer a higher yield than the wider index. It currently yields 8.8%, versus 4.5% for the FTSE 100. It’s also putting in place an aggressive cost-cutting programme which may help to make the business more flexible and efficient.

Although there are risks facing the company and the world economy, it offers diversity and the potential to obtain a high yield. For long-term investors, therefore, it could offer investment potential from both a value and income perspective. As ever, buying potentially undervalued shares is never without risk. But the rewards that are on offer could make it a much stronger opportunity than a buy-to-let.

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Peter Stephens owns shares of Vodafone. The Motley Fool UK has no position in any of the shares mentioned. 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.