As the UK’s largest communications provider, BT (LSE: BT.A) shares have long been a staple of UK income portfolios — particularly within retirement portfolios. The company’s commitment to dividend returns has attracted yield-hungry investors for decades.
However, despite its long history as a safe income stream, it may not be as sustainable as many think. With growth slowing since the pandemic, there may be deeper issues that demand closer scrutiny.
So is BT still worth considering as part of a retirement portfolio? Let’s find out.
An alluring yield
When it comes to income stocks, the dividend yield is typically the main factor that investors look at. In BT’s case, the current 4.7% yield is higher than the FTSE 100 average but lower than it was two years ago. Part of that is due to the 48% price increase in the past five years — but dividend growth has also slowed.
In previous years, the group typically increased dividends by between 6% and 15% every year. But since reintroducing dividends post-Covid in 2022, they’ve only grown 5.6%. In many cases, dividend growth (or lack thereof) is a litmus test for a company’s wider financial picture.
So what’s going on?
For retirement-focused investors seeking passive income, BT still has a lot to offer. It’s a very well-established company with a massive brand following and dominant market position.
What’s more, it outlined a clear dividend growth forecast strategy through 2028, suggesting modest but consistent increases ahead. For investors looking for a consistent passive income stream from a reliable company, that makes it worth considering.
But while these accolades are impressive, they also mask some troubling underlying dynamics.
Cause for concern
With dividend payments accounting for 84.2% of earnings, coverage is far below the recommended levels. Adding to the worries is persistent revenue decline, towering debt levels, and £800m in annual pension obligations. The combination of those factors puts a lot of pressure on BT’s finances — and when finances are tight, dividends are often the first thing to be cut.
However, there’s one silver-lining. The company’s financials reveal strong free cash flow — enough to cover dividend payments 8.5 times over. Unless that suddenly changes, there’s no reason to fear a dividend cut in the near future. That doesn’t mean it won’t happen but if those numbers are correct, it significantly reduces the risk.
The bottom line
BT Group has a relatively strong dividend history but one that’s clearly vulnerable to economic downturns. Previous cuts occurred after the dotcom bubble, the 2008 financial crisis, and the pandemic.
However, in between these periods, dividends were increased almost every year without pause. As such, I wouldn’t expect an imminent dividend cut (barring another market crash or similarly severe downturn). But while its cash coverage and reliable track record add confidence, the debt and pension obligations are too big a risk, in my opinion.
Risk-averse retirement investors may prefer to consider companies with better earnings coverage, more stable revenue and lower debt. Remember, the yield isn’t ‘free money,’ but rather compensation for taking on investment risk.
In the current environment, that 4.7% yield may ultimately prove more volatile than the alternative of seeking income from more defensible, higher-quality dividend payers.
