BT Group plc’s Dividends Are Rising Strongly

BTWhen you think about great dividend payers, your mind might not immediately be drawn to BT Group (LSE: BT-A) (NYSE: BT.US).

The telecoms giant did, after all, only provide a 2.9% dividend yield for the year to March 2014, and that’s only just approaching the FTSE 100‘s long-term average of around 3%. There’s more than that penciled in for the current year, but at 3.4% it still doesn’t approach the index’s top payers offering 5% and more.

What’s so special?

So why do I think BT deserves closer attention from income-seekers? Here’s a quick look at the current dividend situation:

(to Mar)
Dividend Yield Cover Rise
2011 7.4p 4.0% 2.84x +7.2%
2012 8.3p 3.7% 2.86x +12.2%
2013 9.5p 3.4% 2.77x +14.5%
2014 10.9p 2.9% 2.59x +14.7%
12.6p 3.4% 2.08x +15.6%
14.5p 3.9% 2.17x +15.1%

* forecast

Firstly, we need to look beyond that declining yield, because it’s been dropping for the very best of reasons — the share price has been soaring! Over the past five years, the BT share price has gained 170% to 379p while the FTSE 100 has only just beaten 40%.

The reason is that BT shares were depressed by the company’s pension fund crisis, when oodles of extra cash had to pumped into it during the recession as assets values fell too low — but that’s looking like a temporary blip now.

Recovering dividends

The thing is, if we’re looking to build an income portfolio for when we retire in another 10 or 20 years, or however long, today’s yields are less important than the prospects of keeping payments rising ahead of inflation. A company offering a 5% yield today but only just matching inflation is going to fall way behind one that beats inflation every year for a couple of decades.

And just look at BT’s rate of dividend growth!

Long term, it’s the yield on the price we paid that counts, and not the yield on today’s price. So if you’d bought BT shares at the start of 2011 when you could have had them for around 185p, you’d have enjoyed that 4% yield.

What a yield!

But the 10.9p you’d have received in the year just ended would have provided you with an effective yield of 5.9% — and if forecasts prove accurate, you’ll be pocketing 7.8% in 2016!

Those double-digit rises won’t continue indefinitely, but at full-year time chief executive Gavin Patterson did say that “we now expect to increase our dividend by 10%-15% for each of the next two years” — and the cover is certainly strong enough to support that.

Finally, if you're looking for more companies like BT that can genuinely provide rising dividends for your income portfolio, you should have a read of "The Fool’s Five Shares To Retire On" report. They're all top FTSE companies, and between them they provide a nicely balanced selection.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.