8.7% dividend yield! Time to buy this FTSE 100 stock before the ISA deadline?

When in FTSE 100 with generally better than most indices in the stock market correction 2022, many constituents are not profitable. And some businesses, even those believed to be stalwarts, have suffered double-digit declines, sending dividend yields through the roof.

This seems to perfectly describe the current situation Vodafone (LSE:VOD) now. The telecoms giant has seen its share price fall by almost 30% in the past 12 months. And as a result, the current yield is an impressive 8.7%!

If this decline in value is not caused by something that compromises cash flow, investors can see a tremendous income opportunity. So are these the stocks you should add to your Stocks and Shares ISA before the April 5 deadline? Let’s take a closer look.

Dividend yield of Vodafone Ltd

Before jumping into a seemingly cheap income investment, it’s important to verify that it’s a bargain instead of a falling knife.

Despite the drop in value, Vodafone UK’s operations remain strong. Between April and September 2022, the company added an additional 76,000 contract customers that increased its Mobile service revenue by 10.5%. The trend continued into the third quarter, with the churn rate remaining stable at 12.7%.

Meanwhile, Africa’s mobile payment network, M-Pesa, continues to gain market share. The payment volume has increased by a further 14%, bringing the total revenue contribution to the Vodafone service revenue channel to 25.7%. And this double level of performance seems to have spread to other international markets like Turkey, Egypt, and Ghana.

Needless to say, this is all rather positive. And on the surface it shows that Vodafone’s cash flow is set to support an 8.7% yield. So why are stock prices falling on the back of seemingly solid results?

Brewing problems

Although very successful in many target markets, problems appear to be in Germany. After the new change in the law has made it easier for consumers to get out of the broadband contract that resulted in the exodus of 83,000 customers.

This is particularly problematic as Germany is Vodafone’s highest margin market. Pair this with rising costs due to inflation and profit margins have started to get squeezed. All this culminated in free cash flow of €3.2bn and a downgrade in the group’s short-term outlook.

CEO Rick Read has now stepped down after four years on the job. And a replacement CEO has not yet been appointed, with CFO Margherita Della Valle acting as interim leader of the group.

Next dividend payment on Vodafone Ltd. shares. A new cost-saving initiative has been launched to try and reduce annual costs by €1 billion. Meanwhile, a new joint venture with Altice in Germany is trying to bring broadband to more than seven million homes.

If this new strategy is successful, the group may be able to retain its current shareholder payout of 8.7%. But its track record is pretty sketchy, with the share price on a downward trend since 2017. That’s why, personally, I’m in no rush to add Vodafone shares to my current income portfolio.