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

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

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

So, does selling offer a rare opportunity to earn substantial dividend income? Let’s explore.

A market leading dividend

Although the company’s dividend payments are not guaranteed, Vodafone has a track record of rewarding shareholders with distributions during economic turmoil. It continued to pay dividends during the 2020 coronavirus stock market crash and the 2008 financial crisis. However, it is important that the business cut its dividend by 40% in 2019.

What’s more, the dividend cover looks fragile at just 0.8 times earnings. Unless the company’s revenue is increasing, this indicates that it needs to count on cash reserves or sell assets in order to meet its dividend commitment. Accordingly, it is certainly not impossible that the payment can come under threat.

That said, the dividend cap has been lower in the past but the company continues to issue payouts. Since the cut in 2019, I think the distribution is more sustainable, especially if earnings exceed expectations. Although not without risk, on balance, the dividend still looks very good today.

Vodafone share price changes

Vodafone’s share price is trading close to 25, suggesting this is a rare investment opportunity. Perhaps the big decline comes as no surprise as net debt remains unsatisfying and the company’s European revenue continues to shrink, down 1.1% in Q3.

However, the company’s operations in Africa show more promise. Revenue on the continent increased by 3.5% in Q3, driven by higher data usage and strong demand for financial services.

Additionally, it would be nice to see the company attract significant institutional interest. US telecommunications business Liberty Global acquired a nearly 5% stake in Vodafone worth £1.25bn. Chief Executive Mike Fries said: “Stocks are cheap – they are opportunistic and financial investments“.

In addition, the largest shareholder in the e& group, the UAE telecom operator formerly known as Etisalat Group, increased its shareholding to 14% last month.

After all, Vodafone continues to make important moves to repair its balance sheet. The latest announcement is a plan to cut 1,000 jobs in Italy, equivalent to 20% of the country’s workforce. If Vodafone can continue to make efficiency gains without harming growth, this will attract the company’s investment.

Finally, the business could be a major merger deal with Three, worth an estimated £14.5bn. If the deal materializes, the mobile network operators will have a combined market share of around 30%, allowing the company to benefit from scale in an important sector.

Should I buy it?

Vodafone shares face many challenges, but I believe that the falling share price will compensate for the risks faced by investors.

I worry about the sustainability of index-beating dividends, but fortune favors the brave. If I had cash to spare, I would dedicate a small percentage of my portfolio to Vodafone for a potentially massive passive income stream.