Why I’d sell BT Group plc to buy this hidden dividend stock

This income share could be a better buy than BT Group plc (LON: BT.A).

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The income prospects for BT (LSE: BT.A) seem to be risky. The company’s financial performance has come under pressure in the last few years, and this means that the affordability of its dividend has declined. As such, its appeal as an income share seems to be diminishing.

Looking ahead, there could be more pain for investors in the company. Its strategy seems to be struggling to gain traction in an increasingly competitive quad-play industry. Therefore, it could be worth selling in order to buy another income stock which may have passed under the radar of many investors.

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Declining profitability

In the current year, BT is expected to report a fall in its bottom line of 6%. This follows last year’s drop in profitability of 9% and shows that the company is experiencing a difficult period at the present time. Despite this, it continues to increase dividend payments on a per share basis. For example, they are expected to be over 11% higher this year than they were two years ago. This suggests that the company’s dividend affordability is declining.

In fact, BT’s dividend coverage is due to fall to 1.7 times in the current year from 2.3 times in 2016. Although its current coverage ratio may be relatively high when compared to some of its index peers, the stock lacks earnings growth potential. It is due to report a rise in earnings of 3% next year, followed by growth of 1% in the following year. This could mean that the pace of dividend growth slows down dramatically.

Furthermore, with pension costs and investment for future growth continuing to be a drain on its cash resources, dividends may become less of a priority for the company. As such, it appears to be a stock to avoid from an income perspective.

Impressive outlook

One stock which could be worth buying for its income prospects is global professional services provider to the information technology industry FDM Group (LSE: FDM). It released results for the 2017 financial year on Wednesday which showed that it has delivered strong operational and financial progress. Its revenue increased by 23%, while profit before tax moved 26% higher on an adjusted basis. This allowed it to increase dividends per share by 33%, which puts it on a dividend yield of 2.5%.

Looking ahead, FDM is expected to deliver a rise in dividends of 10% per annum during the next two years. This means it could offer an inflation-beating yield over the medium term. This could boost investor sentiment in the stock – especially since its earnings growth rate is set to be high. Over the next two years its bottom line is forecast to increase by around 9% per annum, which suggests that a double-digit dividend rise could be very affordable for the business. As such, it could be an attractive dividend stock.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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