Should I buy BT shares for its near-6% dividend yields?

BT’s sinking share price has driven dividend yields to exceptional levels. So should I snap up the telecoms giant to boost my passive income?

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BT Group (LSE: BT-A) shares remain highly popular. In fact, the FTSE 100 business was the second most purchased stock via Hargreaves Lansdown, my Foolish colleague Edward Sheldon recently noted.

Its shares are particularly popular with dividend investors right now. This has something to do with the sinking BT share price that has driven dividend yields sharply higher. The telecoms titan has fallen 25% in the past three months alone.

For this financial year (to March 2023) the dividend yield sits at a healthy 5.8%. And the figure evolves to an even better 5.9% for next year.

To put this in perspective, the FTSE 100 forward average sits around two percentage points lower.

So is BT a top dividend stock to buy today? Here, I’ll examine its dividend forecast for the short-to-medium term and reveal whether I’d buy BT shares for my own portfolio.

Dividends tipped to rise

It has had a patchy track record as an income stock in recent years.

The business cut the annual payout in fiscal 2019 and paid nothing the following year as it rebased dividends. BT took this step in response to uncertainties created by Covid-19 and the heavy investment it’s making in telecoms infrastructure.

Dividends returned last year with a total shareholder payout of 7.7p per share. And City analysts think rewards will rise to 7.8p and 7.9p in 2023 and 2024 respectively.

Based on current earnings forecasts it should have what it takes it meet these projections too. Predicted dividends are covered between 2.4 times and 2.7 times by expected earnings. Any reading above 2 times is said to provide a wide margin for error.

A top value stock?

BT’s share price133p
12-month price movement-17%
Market cap£13.4bn
Forward price-to-earnings (P/E) ratio6.3 times
Forward dividend yield5.8%
Dividend cover2.7 times

At first glance, it would appear to be a terrific all-round value stock.

As well as those big dividend yields, BT’s sinking share price also leaves it trading on a forward price-to-earnings (P/E) ratio below the widely-accepted bargain watermark of 10 times. Furthermore, its multiple comes in way below the FTSE 100 corresponding average of 14 times.

Too risky right now

But this doesn’t necessarily make the shares a slam-dunk buy in my opinion. Indeed, I believe the company’s low valuation reflects the range of significant risks it faces.

The long-term revenue opportunities for telecoms companies are colossal as the digital revolution kicks off. Our need for fast-fibre broadband is rising, thanks to factors like flexible working and the growth of streaming.

However, this may not necessarily translate to big profits at BT. The huge rollout of 5G and broadband is costing the company many billions of pounds. It also faces huge interest payments on its nearly-£19bn worth of debt as the Bank of England hikes rates.

BT also faces huge revenues trouble in the near term as the UK economy flirts with recession. This is particularly dangerous given the highly-competitive market it operates in and the growing appetite of consumers to shop around.

So I’m happy to avoid BT shares and invest in other dividend stocks today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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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