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Down 17% in a month, should you load up with BT for that 7% dividend yield?

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Over the past month, the BT (LSE: BT.A) share price has dropped by around 17%. At 171p, it’s getting close to revisiting the low of 158p it set last August.

Nobody can tell what will happen next with the telecoms stock. But one possibility is that the downtrend established since the end of 2015 may continue – watch out for new lows in the price for confirmation of that scenario playing out.

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Trends tend to continue

Over the years, studies have revealed that shares are more likely to continue a trend than they are to handbrake-turn and reverse direction. And that applies whether the trend is down or up.

To me, that’s a valuable insight if we are engaged in a contrarian investment strategy. Going against the herd and investing in stocks that are down on their luck can be fraught with difficulty.

I reckon it’s common for contrarian-minded investors to enter a trade based on their own analysis of a company’s fundamentals only to see their investment plunge as the downtrend in the share price continues.

However, there’s not much danger of me attempting to buy shares in BT today based on my own analysis because I can’t see any catalyst on the horizon that could change the outlook. More astute investors than me may have some insight that leads them into the stock, but for me, the evidence must be face-slappingly obvious.

For example, I would want to see early signs of improving trading and finances or a company news announcement that changes the game in some way. And there’s no sign of that with BT, to my eyes. Indeed, the company has a ton of debt, Capex has been rising, and City analysts following the firm expect revenue earnings and cash flow to stagnate further and remain broadly flat.

Dividend set to drop

However, one thing that looks likely to move is the shareholder dividend, and not in a good way if you hold the stock. On the share research website I looked at, the forecast for the trading year to March 2021 shows the dividend down about 21%. If that happens, the forward-looking dividend yield is running near 7%.

But is it worth picking up some of the shares to harvest the dividend income, perhaps while waiting for a turnaround in the business and the share price? Not to me. My basic test for a decent dividend-led investment is that there’s a record of annual rises in the dividend supported by generally rising cash flow, earnings and revenue. BT fails that test.

On top of that, though, I’d wait for ‘confirmation’ from the share price before taking a contrarian position in any share. In other words, some evidence that the downtrend might be over.

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Kevin Godbold has no position in any share 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.

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