In a shock to FTSE 100 income investors, BT (LSE: BT.A) cut its dividend yesterday. Hitting investors with a triple blow, the telecommunications company advised that it was suspending both its final 2019–20 dividend and all dividends for 2020–21, and that it was expecting to resume dividends in 2021–22 with a payout of 7.7p per share. That equates to just 50% of last year’s payout.
Here I’ll look at what the dividend cut from BT means for FTSE 100 income investors. I’ll also explain how I’d go about building a robust dividend portfolio today.
The game has changed for FTSE 100 income investors
One thing I’ve always said about dividend investing is that you have to do your research. It’s not as simple as it seems. Before buying a dividend stock, it’s important to look at factors such as revenue and earnings growth, debt, and dividend coverage (the ratio of earnings per share to dividends per share). Buying a stock simply because it has a high yield generally doesn’t end well.
Looking at BT, there were certainly warnings signs that it might cut its dividend. In fact, I’ve been warning that BT could cut its dividend for years now.
For example, all the way back in late 2017, I said that BT’s huge debt pile and monstrous pension deficit “could have implications for the dividend payout”. Then, late last year, I said: “I believe it’s only a matter of time until we see the payout cut”. More recently, on 12 March, I said: “I think there’s a good chance [the dividend] will be cut in the near future, due to the company’s large debt pile and pension deficit”. Those that focused on the risk factors here may have avoided the cut.
The Covid-19 crisis has only reinforced my view on dividend investing. Nearly all the high-yielding stocks in the FTSE 100 have cut their dividends recently. Those who were hanging on to struggling companies just for the yield have been hit hard. Clearly, the game has changed for income investors.
How I’d build a dividend portfolio today
So, what’s the best way to build a dividend portfolio today?
Well, the first thing I’d do is focus less on high yield and more on sustainable yield.
I’d forget about struggling companies like BT and instead look for companies that have attractive long-term growth prospects, solid balance sheets, good dividend growth track records, and healthy levels of dividend coverage. Companies with these attributes are less likely to cut their dividends.
Some examples of these types of companies include the likes of consumer goods firm Unilever, accounting software specialist Sage, and healthcare company Smith & Nephew. None of these FTSE 100 companies pay huge dividends. However, they are all reliable dividend payers. None have cut their dividends, so far.
Of course, I’d also diversify my capital over many different dividend stocks in order to reduce portfolio risk.
It’s never been more important to do your research before buying a stock for its dividend. If you’re looking for more information on dividend stocks, you’ll find plenty of valuable insight right here at The Motley Fool.
Edward Sheldon owns shares in Unilever, Sage, and Smith & Nephew. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Sage 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.