With abysmal interest rates on offer from UK savings accounts in recent years, many investors have turned to FTSE 100 dividend stocks for income. That’s not really surprising when you consider that many footsie stocks currently yield over 5%. Yet when picking stocks for income, you have to be a little careful with high-yielding firms. Sometimes, a high dividend may not be sustainable.
With that in mind, here’s a look at one FTSE 100 dividend stock I think investors should avoid and another I’m more bullish on.
BT (LSE: BT.A) shares have a very high yield at present. Last year, the company paid shareholders 15.4p per share in dividends, which means that the trailing yield is currently a massive 7.4%. That’s one of the highest in the FTSE 100. Yet, if income is your goal, I think it’s worth being careful with BT Group. Here’s why.
Often, when a stock has a yield that is super high (7%+), it’s a signal that the market doesn’t believe the company’s dividend is sustainable. What’s happened is that many investors have already dumped the stock, in fear of a dividend cut. That’s driven the share price down and the yield up. While the high payout looks attractive, it could be a yield trap.
In BT’s case, it’s clear that many investors have already dumped the stock, as the shares have fallen more than 50% in the last two years. This suggests that the market really doesn’t think BT’s dividend is sustainable. And that doesn’t surprise me. Because, as I detailed here, BT has a lot of debt on its balance sheet at the moment along with a nasty pension deficit that it needs to sort out. Both debt payments and pension contributions are going to consume more cash flow in coming years, and that could mean that less cash is available for dividends.
So while BT’s 7.4% dividend yield looks attractive in today’s low-interest-rate environment, I’m not convinced the FTSE 100 stock is a top pick for income, as the dividend may not be sustainable.
Lloyds Banking Group
One dividend stock I’m more bullish on is Lloyds Banking Group (LSE: LLOY). It doesn’t have an unblemished dividend track record, as the bank ran into financial difficulties during the Global Financial Crisis and stopped paying its shareholders for several years. However, in recent years, profitability has improved significantly, and since 2014, the bank has paid the following dividends to investors:
FY2015: 2.25p (+0.5p special dividend)
FY2016: 2.55p (+0.5p special dividend)
You can see there’s a nice upward trend there. And looking ahead, City analysts expect Lloyds to keep lifting its payout in the near term, with 3.45p per share and 3.67p per share expected for FY2018 and FY2019 respectively. At the current share price, the forecast dividend of 3.45p per share equates to a prospective yield of 5.6%, meaning that Lloyds could be a cash cow.
It’s worth noting that with Brexit on the horizon, the shares aren’t without risks, however, given that the stock trades on a forward P/E of just 8.2 right now, I believe the risk/reward profile is attractive at present.
Of course, there are plenty of other stocks in the FTSE 100 that yield 5% or higher. If high-yield stocks interest you, take a look at the report below.
Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.