How much passive income could I make if I buy BT shares today?

BT Group shares offer a very tempting dividend right now, way above the FTSE 100 average. But it’s far from being a no-brainer buy.

| More on:

Image source: BT Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT Group (LSE: BT.A) shares are on a forecast dividend yield of 7.4% for 2024.

Forecasts show it steady in the next few years, and even rising a bit. And to top the cake off with icing, the dividend cash should be around twice covered by earnings.

On the face of it, it sounds like BT shares could be a great long-term income buy. And I think they might indeed be. I can’t ignore the terrible 10-year share price record, though.

The BT dividend

Before I try to work out what I might earn in income from BT shares, I need to think about the dividend a bit. Some things I like well enough, others not so much.

BT dividends score well on the yield, which is well up in the top half of the FTSE 100. I like to see dividends being covered by earnings, so that’s another plus for BT.

My favourite dividends come from cash cow companies that don’t need to keep investing huge sums to keep going. BT has reasonable, and rising, cash flow. But, boy, does it need to invest big to grow its broadband and other offerings.

Debt

Then I also prefer firms that are not under debt pressure. And, well, BT scores a big fat zero on that one.

Net debt of £19.7bn at the last count? For a company with a market cap of just £10bn? Double ouch! I don’t like that one bit.

Then again, BT shareholders can point to the fact that the debt is being serviced just fine. And the amount of cash handed out as dividends wouldn’t make much dent in it anyway.

In fact, funding from debt can be a good way for a firm to make the most of the limited assets it has.

How much?

So what about the big question, how much might I earn from a dividend like BT’s?

Suppose I put a fairly modest £200 per month into BT shares, they keep on paying me that 7.4% each year, and I buy new shares with the cash?

After 20 years, I could end up with £107,000 in the pot. And 7.4% of that would be nearly £8,000 a year in income?

Do that with a few different stocks, paying decent dividends, and my old age might turn out quite comfortable.

Take the risk?

Still, there is that debt. Oh, and BT also has a big pension fund deficit. And it’s having to invest a fortune each year to chase bandwidth in a very competitive market.

And how much capital could I lose if the share price keeps on going down?

The risks are legion, and a big part of me says I should keep a good bargepole’s distance from BT shares.

But something else is nagging me to not dig too deep, and just shut up and take the cash.

I’m not sure I can bring myself to buy shares in a firm with BT’s debt. But I really can see how an investor might want to add some to a diversified dividend portfolio.

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.

Alan Oscroft has no position in any of the 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »

Satellite on planet background
Investing Articles

At just under £14, can BAE Systems’ share price still be a prime FTSE 100 bargain? 

Despite its bullish price run, BAE Systems’ share price still looks undervalued to me and appears set for strong growth.

Read more »

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »