Vodafone has been, and currently remains, a stalwart of the UK income sector, which is no surprise given that it yields close to 5%. It has an average position size of 4.4% across the top 10 funds in the IMA UK Equity Income Sector.

However, Michael Clark, portfolio manager of Fidelity MoneyBuilder Dividend fund, has recently sold his position in the company and recycled the proceeds into companies where he has confidence in the long term sustainability of the dividends and the potential for dividend growth.

Here, he explains why…

My investment strategy is focussed on identifying stocks which show stability of income and importantly, commitment to dividend growth. Following the sale of its Verizon Mobile asset, one of its main cash generative assets, I no longer think Vodafone can demonstrate this, and as such, I took the decision to sell out of the stock.

Our analysis following the deal has significantly reduced my confidence that a post-Verizon Vodafone will be able to cover its dividend with free cash flow, or sustainably grow its dividend. The type of dividend growth I want in the fund requires earnings growth – i.e., not income from debt or asset sales, which often proves unsustainable over the longer term.

Given the unpredictable nature of the telecoms business and the severe pressures within the sector in Continental Europe where Vodafone does most of its business, I think Vodafone’s previously attractive dividend policy will come under severe pressure following the change in the business’s fundamentals.

We have to be aware of potential changes to the way in which a company is run as early as possible as, if we decide to sell, we will need to replace the income from other sources as quickly as we can.

We have always made it clear to investors that we endeavour to increase the dividend from this fund year-on-year, the growth of income is a key tenet of the MoneyBuilder Dividend Fund. That means, however, if a big holding changes its policy, we have to find the income elsewhere.

In this instance, I saw attractive opportunities for dividend and dividend growth among the consumer names. I have increased the position in SAB Miller, an emerging market beverages company which should provide investors with significant dividend growth over the coming years. Greene King is an integrated pub company with a high quality of portfolio of pubs. Their focus on food is working well and steady single digit earnings growth should translate into an increasing dividend payout over time.