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These FTSE 100 dividend shares both have dividend yields above 5%. Which of them do I think investors should consider buying for long-term passive income?
Vodafone: annual dividend growth 0%, dividend yield 5.2%
What I like:
- Telecoms demand is growing as the digital revolution continues.
- Large investments in 5G and broadband provide sales opportunities.
- Cost-cutting and asset sales are reducing debt.
- The Vodacom division offers exposure to fast-growing African markets.
What I don’t like:
- High capital expenditure puts a strain on earnings and dividends.
- Intense market competition threatens revenues and profit margins.
- Regulatory changes in Germany — Vodafone’s largest single market — remain a challenge.
- Currency risk is severe as sales come from multiple regions.
Vodafone (LSE:VOD) cut the full-year dividend to 4.5 euro cents per share last year. It was a move widely expected given the firm’s significant capital expenditure costs and huge debt levels. Net debt is falling, but still registered a hefty €22.4bn in March.
But having grasped the nettle, the business is in better shape to deliver sustainable dividend growth long-term. Given the enormous structural opportunity it has, underpinned by the expanding digital economy, I think cash dividends could grow strongly over time.
Bear in mind though, that regulatory changes are a constant threat to telecoms companies. In this case, it continues to struggle to grow revenues following recent changes to bundling laws in Germany.
But on balance, I think Vodafone shares are worth serious consideration. I like its scale, and its strong market positions Europe and Africa’s telecoms and mobile money markets.
BP: annual dividend growth 5%, dividend yield: 6.1%
What I like:
- Strong cash flows underpin market-leading dividends.
- New oil discoveries and projects are performing well.
- Refocusing on oil may boost short-term earnings.
- Shares trade at a discount to those of BP’s North American peers.
What I don’t like:
- Oil prices are volatile, and supply and demand signals remain poor.
- Migrating from renewable energy could reduce long-term profits.
- Significant capex is driving debt higher.
- Exploring and drilling for oil is risky.
Substantial cash flows can make oil stocks like BP (LSE:BP.) lucrative dividend shares to buy. They enable these companies to regularly return cash to their shareholders through market-beating dividends and share buybacks.
BP itself remains committed to dividend growth — in April, it raised the latest quarterly dividend to 8 US cents per share. And with solid progress made with new projects (like the Raven field in Egypt), it could continue to enjoy impressive cash generation.
However, persistent oil price volatility and rising debt levels mean investors should be mindful of the longer-term outlook.
BP’s large debt pile, which rose from $23bn to $27bn between December and March, is one major reason for concern. It continued climbing even as the company cut costs and slashed capex spending. If oil prices fall, that debt load could become harder to manage.
Dividends are also in danger beyond the near term as the company reduces its renewable energy footprint. As the world moves towards cleaner sources like wind and solar, it risks being left behind strategically.
All things considered, I think investors should think about avoiding BP shares.
