In the current low-interest-rate environment, the hunt for higher yield is on. Even with the central bank rate being at 0.75%, your current account is probably paying you nowhere near that.
A savings account may get you towards 0.5%, but if you move to a Cash ISA with easy access to your funds, you can get in the range of 1% to 1.3%. Still, if I am putting in £1,000 into my Cash ISA, that means I am only going to be getting back £10 to £13 a year. It is tax-free, but on that kind of return, it does not make much of a difference.
Therefore, an alternative a lot of investors like myself prefer is to invest the funds I would put in a Cash ISA into a stock that pays out a dividend. When you divide the dividend per share you receive by the share price you paid for the stock, you generate a number that can be used to compare against other potential investment options.
Can I find attractive dividend yield options?
One attractive dividend yield I want to focus on is BT (LSE: BT-A). It may be a household name, but the business has been struggling over the past few years, largely due to an increase in competition, along with regulators making it more difficult for the firm to operate.
Before we dig into whether the share price itself is worthy of buying on a fundamental basis, let’s review the dividend yield. It currently sits at just under 10%, meaning you can get roughly a 10 times increase versus a Cash ISA. The £1,000 investment I mentioned above would provide you close to £100 a year from the dividends received, which sounds a lot more appealing!
But one of the reasons the dividend yield for BT has risen is due to the share price falling. Using the equation we looked at earlier, if the share price is low and the dividend stays the same, it gives you a higher yield. For the moment, BT has kept a dividend of around 15p per share consistent, so this gives me some confidence in buying into the share now to lock-in this yield.
You can make the argument that the dividend may be lowered or cut completely after chairman Jan Du Plessis commented last summer that a reduction may be needed. However, dividends have been paid since then with no change, so we wait and see.
The earnings figures BT released in October showed revenue falling by 1%, but profit holding at £1.3m, the same as the year before. The trading update said that the business was on track to meet the full-year outlook, something which was backed up in the latest update given last month.
For me, the performance is steady, if unspectacular. But really, when the share price is trading at multi-year lows and has a cheap P/E ratio below 10 (the FTSE 100 average is 17), performance does not need to be amazing. A stable financial position that offers a stable share price allows dividend investors to benefit from the income without suffering a large capital loss on the investment. This makes BT a buy for me.
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Jonathan Smith and The Motley Fool UK have 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.