The dividend yield for the FTSE 100 telecom provider BT (LSE: BT-A) has risen to 10.4%. This is entirely because its share price crashed to multi-year lows along with the slump in equity markets. This means, that if I buy BT’s shares at today’s price, I’m assured double-digit return so long as the company maintains its current dividend policy.
Compares favourably to other high dividend yield stocks
This makes BT a great stock for the income investor today. Only two FTSE 100 stocks offer a higher dividend yield. One is the mining company EVRAZ, which offers a yield of 16% but doesn’t have the dependable history of paying dividends that BT does.
The second is the tobacco biggie, Imperial Brands, which has a yield of 12.2%. Unlike EVR, IMB does have a long history of paying dividends, but there are two risks to its share price. One, it has changed its dividend policy. Earlier it used to increase the dividend amount by 10% every year. It will now be linked to performance. Given IMB’s inconsistent earnings’ record, there’s some doubt about whether it can maintain this level of dividends.
The second risk is the structural decline in cigarette consumption and the regulatory hurdles to its next generation products, like vapes. Compared to IMB, BT has just one risk – that of lowered dividends in the future. According to a Financial Times report from last year, BT’s management mentioned that it would consider reducing dividends to fund the fibre broadband network.
Assessing the possibility of dividend cuts
But would it necessarily do so? I like to consider earnings per share (EPS) numbers to figure out dividend prospects. This is because it gives some perspective on how much the company can potentially pay out. If a company’s EPS increases, there’s chance of better dividends (or at least maintaining them at their past levels) even if the company wants to set aside a higher amount for capital spending.
For BT, the number increased marginally in its half-year update compared to 2018, which bodes well for income investors. It hasn’t released the EPS number in its latest nine-month trading update, but its profits are smaller than last year. My rough estimates show some decline in EPS as a result. If the softening in profit continues for the remainder of the year, EPS might fall further. This will increase the possibility for a dividend cut. But that’s a wait and watch.
Even if I consider a scenario where BT can’t maintain its dividends, the outcome can still be a good one for income investors. This is because it would likely cut dividends and not stop them completely given its long history of payouts. I think BT continues to remain a relatively safe stock to invest in for a passive income. Needless to say, it’s not a growth stock. In fact, its share price has been declining for a long time. But it makes up for that through a steady passive income.
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Manika Premsingh owns shares of BT GROUP PLC ORD 5P. The Motley Fool UK has recommended Imperial Brands. 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.