BT (LSE: BT.A) shares have been a very poor investment in recent years. Over the last five years, BT’s share price has fallen from around 452p to just 116p – a decline of approximately 74%.
Of course, BT has paid its investors some big dividends over the last five years, which have offset the share price losses to a degree. However, overall, the returns from the FTSE 100 stock have been disappointing.
BT’s share price has tanked
If you’d bought £1,000 worth of BT shares five years ago, those shares would now be worth around £256 (ignoring trading commissions and stamp duty).
It’s fair to say that’s an absolutely terrible return. That’s the kind of return you might expect from a poor-performing small-cap AIM stock with no revenues or profits. Not the kind of return you expect from a well-established FTSE 100 company.
Adding in the dividends does improve things, a little. If you’d bought £1k of BT shares five years ago, you would have received a total of about £162 worth of dividends (assuming dividends weren’t reinvested) by now.
This means that all in, £1,000 invested in BT shares five years ago would now be worth roughly £418. You don’t need me to tell you that’s an abysmal return.
£418 vs £14,300
Can we learn anything from BT’s spectacular share price collapse? Absolutely.
One key takeaway here is that you shouldn’t buy a stock just because it’s popular, or a member of the FTSE 100 index. Just because a stock is popular doesn’t mean it will be a good investment.
Often, the best-performing stocks are those that are a little more under the radar. Take Boohoo, for example. If you’d bought £1,000 worth of Boohoo shares five years ago, that money would now be worth over £14,300.
Another takeaway is that it’s essential to look at a company’s growth prospects, and its financial health before investing.
BT has been struggling to generate any growth for years now. It has also looked financially vulnerable due to its huge debt pile and its monstrous pension deficit. These issues have hurt the share price.
Finally, BT’s share price collapse is a good reminder of the importance of portfolio diversification.
If you’d bought BT shares five years ago, but they were only 2% of your portfolio, a 74% share price loss would not have hurt your portfolio’s performance too much. However, if you’d bought the stock five years ago, and they were 20% of your portfolio, the share price collapse would have had a big negative impact on your overall performance.
Even well-established FTSE 100 companies can experience share price declines of 50% or more. So, when investing in shares, it’s important to spread your money out over many different companies, in order to reduce your stock-specific risk.
Edward Sheldon owns shares in Boohoo Group. The Motley Fool UK has recommended boohoo 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.