When building a portfolio of dividend shares, price performance isn’t usually a factor. Still, it doesn’t hurt to see my income stocks act like growth stocks now and then.
This month I got a huge surprise from a dividend stock that’s delivered very little gains over the past year.
Keeping the nation connected
The nation’s leading telecoms company, BT Group (LSE:BT.), is up a huge 25% over the past month. That makes it the top-performing share on the FTSE 100 in May. Combined with a decent 6.3% dividend yield, it equates to some very nice returns.
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Naturally, the price isn’t likely to increase this much every month. So what prompted the sudden jump?
A huge cloud of debt of has been hanging over BT’s head for a while now. At £18.5bn, it’s about 50% more than the company’s market cap of £12bn. A declining share price hasn’t helped the situation. But it’s close to completing its costly fibre broadband rollout and last month announced positive 2023 FY earnings results. Adjusted revenue and earnings before interest, tax, depreciation, and amortisation (EBITDA) rose slightly, along with net cash flow and earnings per share (EPS).
With dividends well-covered by earnings, there’s little chance of a pause in payments even in performance lags for a period. However, despite the good coverage, analysts predict the yield will fall to 6.1% in the coming years. This may be due to slow earnings and revenue growth, which is forecast to remain low for the next three years.
Top British telly
ITV (LSE: ITV) is only up 11.8% this month but has a slightly higher yield than BT, at 6.5%. It also sports a similar payout ratio of just below 100%, allowing for just enough earnings coverage to support payments. Like BT, payments were paused during Covid but have returned to the same consistent reliability. But unlike BT, the yield is expected to increase to over 7% in the coming years. This speaks to analysts’ confidence in the broadcaster’s future.
But the increase is minimal compared to the 28% decline the price has suffered in the past five years. While it’s on the right track, it has a way to go before regaining the highs of 2015. Top British shows like Love Island and The Voice are boosting revenue but it still faces stiff competition from on-demand video platforms like Netflix.
An industry under fire
Major UK tobacco firm Imperial Brands (LSE: IMB) has the highest yield on this list at 7.72% but is only up 5% this month. Still, it’s higher growth than most other dividend stocks I hold.
The downside is that tobacco is a risky industry, with global regulations cracking down on the sale of cigarettes. Although it’s making some progress with its next-gen products (NGP), these are also at risk of being regulated in future. So I’m wary of how long its business model can remain profitable.
But for now, it’s a good dividend payer. It currently pays an annual dividend of £1.46 that is well-covered by EPS of £.244. The yield is also forecast to increase to 9% in the coming years. So while the industry may eventually die out, I’m hoping to enjoy the returns for a few more years at least.
