Is telecoms giant BT now a no-brainer stock for passive income?

This time, BT ‘smells’ different, and I finally believe it may make a decent investment for passive income from the dividend.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

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‘s (LSE:BT.A) shot up since May’s bullish update and outlook statement from the company, but the stock still looks attractive for passive dividend income.

Created with Highcharts 11.4.3Bt Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

With the telecom company’s share price near 139p (26 June), the forward-looking dividend yield for the trading year to March 2026 is almost 5.8%.

That’s tempting in itself. But after chief executive Allison Kirkby’s assessment last month, I reckon there’s a good chance of incremental dividend growth in the coming years.

Recovery and growth

So shareholders may be able to lock in a decent and growing passive income from that dividend. But there’s the possibility of capital gains from a rising share price too.

It’s happened before. BT looked like it was on the floor in spring 2009 after the credit-crunch and during that decade’s ‘great’ recession. But between then and the end of 2015, the stock rose by more than 500%.

However, one of the ongoing worries is the company’s mountain of debt on the balance sheet. That’s been fuelled by the need to invest so much money into next-generation networks, including the massive full-fibre broadband rollout.

So Kirkby’s assertion that the firm has now passed peak capital expenditure (capex) on the fibre network came as a relief to the market. I reckon that’s what the strong rally in the shares has been all about.

Such sudden moves higher often put off value-oriented investors. That’s understandable. But one argument is the fundamentals and outlook of the business have improved. Therefore, the up-rating looks justified.

The company’s £3bn cost and service “transformation” programme was completed a year ahead of schedule. And the business has reached “the inflection point”, regarding its long-term strategy, Kirkby said.

Increasing free cash flow

It’s been well reported, but now the firm reckons it can more than double its normalised free cash flow over the next five years.

Nothing’s guaranteed and the business may yet run into more unforeseen challenges along the way. For example, a down-turn in the economy would almost certainly sink the share price again.

Nevertheless, forecasts for better free cash flow strike me as a supportive factor for ongoing growth in the dividend – perhaps the most important factor of all.

After years of nose-wrinkling, I’m finally starting to believe that BT may be capable of passing my sniff test. Things feel different to me now. This turning business may be entering an enduring period of recovery and growth (I hope).

Looking ahead, Kirkby said the company’s sharpening its focus and “accelerating” the modernisation of its operations. It’s also aiming to optimise its global business operations.

Overall, Kirkby reckons BT’s now positioned to generate “significant” growth. And, on balance and despite the risks, I think the stock has the potential to deliver decent passive income for its shareholders via an ongoing stream of dividends.

However, despite my enthusiasm, I’d stop short of calling it a no-brainer because all stocks have the potential to disappoint as well as to delight. But I see it as worthy of further research.

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.

Kevin Godbold 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

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »