Why British Sky Broadcasting Group PLC Is My Ideal Dividend Investment

When the internet was invented, it was said that this was the end for television. But it wasn’t really the end of the age of television, but the beginning of the age of choice.

A highly profitable business

Remember when there were only five television channels? These days we are blasé about there being hundreds of channels to choose from. Since the last century we have had the dawn of digital TV, widescreen television, high definition and 3D. These days we can record TV and we can rewind live TV. We have televisions that can connect with the internet and which can stream video; we have TVs that produce a picture so sharp you feel you are actually there.

BSkyB (LSE: BSY) has been at the forefront of these technological advances. This company has raised the bar, developing an offer that adds to and complements the free services provided by the BBC and ITV. Plus it is now tying in its TV offer with broadband and phone calls.

Sky has now garnered over 10 million TV customers, plus millions more broadband and phone customers. The company has reached a critical mass, which means it is now churning out steadily increasing profits.

skyConsolidating in the UK and growing in Europe

BSkyB’s main headwind is its battle with BT over sporting rights. The addition of an extra pay-tv competitor will definitely have an impact on profitability, and I think adds to the overall picture of a company whose growth in the UK is slowing, but which is still generating a tonne of cash. After so many years of expansion, I think BSkyB is consolidating in this country.

But while the company is consolidating in Britain, there is the prospect of BSkyB creating a Sky Europe by buying Sky companies in Germany and Italy. Sky has fewer customers in these two countries, so there are future growth opportunities, with the European companies drawing on BSkyB’s strengths.

What about the fundamentals? Well, consensus estimates a P/E ratio of 13.7, falling to 12.5, with a dividend yield of 3.8% rising to 4.1%. This indicates that the company is steadily growing, yet is reasonably priced. It is a highly cash-generative business that produces a rising income. So, overall, I rate BSkyB a buy, particularly suited to dividend investors.

How to create dividends for life

I see companies such as BSkyB as ideal dividend investments, as they combine share price growth with a rising dividend yield. In this way you have steadily increasing returns year after year, while minimising risk.

We at the Fool have written a free guide all about high-yield investing, which tells you all you need to know about this investing technique.

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