The Motley Fool

Why BT is a FTSE 100 dividend share I’d buy today

The income investing prospects of BT (LSE: BT.A) could prove to be somewhat risky. The telecoms company is undergoing a period of significant change, with a new CEO due to commence work at the business in less than a month. And with cost-cutting ongoing and its financial outlook being downbeat, it may appear as though the stock lacks dividend investing potential.

However, there could be a value investing opportunity on offer. The company has a relatively low valuation, as well as a high yield. This suggests that it could be worth buying in my opinion alongside another income stock which released positive results on Wednesday.

Improving outlook

The stock in question is hard landscaping manufacturer Marshalls (LSE: MSLH). It announced that recent trading has been strong, with revenue for the first 11 months of the year rising by 14% to £465m. Its self-help programme is achieving its goal in supporting organic growth, while the underlying indicators in a range of markets remain positive.

Alongside its trading update, the company also released news of an acquisition. It has purchased Edenhall Holdings for an initial cash consideration of £11.8m and deferred consideration of up to £5.4m. Edenhall is an independent brick manufacturer and a supplier of concrete facing bricks. The deal is in line with the company’s strategy of expanding into adjacent building products related to New Build Housing.

Looking ahead, Marshalls is expected to report a rise in earnings of 15% in the current year, which puts its shares on a price-to-earnings growth (PEG) ratio of 1.3. Its growth rate could prompt a rise in dividends – especially since they are covered 1.7 times by profit. As such, its 3.2% dividend yield could become increasingly appealing.

Income potential

As mentioned, BT could offer a relatively attractive income investing outlook. The stock has a dividend yield of 6.1% at the present time, which is around 170 basis points higher than the FTSE 100’s income return. This indicates that investors may be expecting a challenging period for the business and its dividend, with 2018 and 2019 representing periods of significant change.

Strategy changes could take time to have their desired impact, while a new CEO may have more scope to reduce dividend growth in order to facilitate further expansion. A dividend cut could even be on the cards, although a payout ratio of 60% sounds both affordable and relatively prudent given the company’s size, scale and diversity.

As with many FTSE 100 shares, the prospects for BT over the coming months may be somewhat challenging and difficult to accurately predict. However, for investors who are searching for a high yield from a business that could deliver a successful turnaround, it could be worthy of a closer look.

Certainly, it may be riskier than some of its index peers and dividend growth is not guaranteed. But given its margin of safety and the progress being made on the implementation of its new strategy, the stock could have an increasingly favourable risk/reward ratio.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.