Thursday, August 29, 2013

Dividends and Income VODAFONE what should an income investor do?

Vodafone (VOD)  - A 28.82% return

Telecoms pay very good dividends and are always being considered for investors interested in dividends and income.   

However, these companies rarely make the grade to be included as dividend machines.  Telephone (T) and Verizon (VZ) do not make as much money as they payout.     BCE makes the cut.   CHL and CHT are good income producers but not as solid as a dividend machine investor would like.

Vodafone (VOD) what to do?

I do not just invest in dividend machines.  Vodafone (VOD) is a good example.   Instead of buying Verizon, I bought VOD.    My basis is $25.75.   They have paid dividends each of the two years I have owned VOD but the dividends vary a lot.   I have been waiting for Verizon to make their move and buy VOD while I cash those dividend checks.  

Verizon has made a few feeble efforts.   Today's news seems to suggest they are really serious.    I would not buy VZ on this news as they are adding debt to an already big balance sheet to finance the buyout and I would not add to VOD because they have negative earnings.

Vodafone (VOD)  three choices:

I have three choices on VOD.  (1)  I could sell it right now, and that is not a bad idea, although I may miss upside potential; (2) I could set a stop at say $30 and lock in that gain if the deal falls apart and VOD slips back into the $20's; (3) I could sell a call at close to today's price which would provide income and the potential for capital gains but if the deal falls apart, I again would be stuck with VOD.

My take is that the deal will go through because VZ needs what VOD has.   Since my major priority is income, I am going to sell the call.    This table illustrates the gain from this transaction.

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