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BT Group plc vs Headlam Group plc: which 4.6% yield is better for dividend hunters?

For income chasers, telecommunications titan BT Group (LSE: BT-A) and flooring  manufacturer Headlam Group (LSE: HEAD) have both proved to be terrific stock picks.

Steady double-digit earnings growth at Headlam recently has really lit the fire under dividends, meaning that payouts have risen at an annualised rate of 8.7% during the past five years.

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And the story is a similar one at BT, with solid bottom-line expansion prompting dividends to grow at an even better compound annual growth rate of 11% since fiscal 2012.

Flooring the competition

City brokers certainly don’t expect yields at Headlam to fall by the wayside any time soon. A predicted ordinary dividend of 27.8p per share for 2017 is up from 22.55p last year, and yields an impressive 4.6%.

And Headlam’s full-year financials released on Tuesday certainly give credibility to the Square Mile’s sense of optimism.

The Birmingham company advised that total revenue climbed 6% last year, to £693.6m, with like-for-like sales shooting 4.7% higher. The result powered underlying pre-tax profit 12.6% higher to £40.1m, and also prompted Headlam to shell out a special dividend of 8p per share for 2016.

Lauding last year’s results, chief executive Steve Wilson commented that “2016 was another successful year for Headlam and we were able to significantly outperform the steady growth in the UK floorcoverings market.”

And Wilson expects the flooring ace to keep on trucking into the current period, noting that “2017 to date has shown continued growth in the UK and Continental Europe, and we look forward to the year with confidence.”

Bad news at BT

But while Headlam’s investors look likely to toast another successful year in 2017, the sheer amount of bad news coming out of BT more recently suggests a much tougher time is in store.

BT’s share price slumped to its cheapest since mid-2013 in January after the accounting scandal at its Italy division proved to be much worse than feared. And the scale of the ‘worseness’ was something to behold, the black hole exploding to £530m, massively up from the £145m prediction made just three months earlier.

However, this is not the only reason for income investors to be concerned. Not only does BT face the prospect of having to chuck larger and larger sums at Openreach, but it is also forking out eye-watering sums to stop its consumers fleeing to Sky. Just this week BT paid a staggering £1.2bn — up from £900m just three years ago — to retain exclusive broadcasting rights to the UEFA Champions League and Europa League football tournaments.

The City does not expect these troubles to throw a spanner in the works of BT’s progressive dividend scheme, however, at least not in the near-term. For the years to March 2017 and 2018 the company is expected to pay rewards of 15.3p and 17p per share respectively, an increase from fiscal 2016’s 14p. And these projections yield 4.6% and 5.1%.

But with BT also battling its colossal pension deficit — the next review is due in June — I for one believe the business may be forced to pull back on its generous dividend policy in the near future.

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Royston Wild 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.

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