In the past, BT Group (LSE: BT.A) shares didn’t really make it on to my long-term income list. But I think I might be changing my mind.
The yield has been high for a long time, and BT has maintained good cover by earnings. So that’s not the problem.
No, it’s all about BT’s high debt. Or at least, it has been. These days, I’m not so sure it’s such a big problem. I’m sure it must have contributed to the five-year share price fall, though.
Dividend policy
BT suspended its dividend in the Covid crash. It’s since restarted, at half the previous amount. So is this where BT starts to rein in the dividend and use the cash to pay down debt instead?
No. The board soon assured us that its progressive policy was back on. With earnings expected to be flat for the new few years, the cash looks likely to be maintained at last year’s 7.7p per share.
And on the current BT share price, that would mean a very nice 7.5% dividend yield.
Long-term returns
With that rate of return, how many BT shares would I need to get my £10k per year passive income?
I’d need close to 130,000 shares. And at 102p apiece, I can’t quite afford to buy that many right now.
But investing isn’t only for those with big chunks of change to plonk down. In fact, most successful Stocks and Shares ISA investors got there by investing modest sums regularly.
Just 17 years
One thing I could do is invest £350 per month in BT, and buy new shares with my 7.5% dividends each year. And that could get me to my target in a bit less than 17 years.
That’s without any share price rises, though they could be a bit double-edged. If the shares go up faster than any annual dividend rises, I’d get a lower yield and be able to buy fewer new shares with it.
There’s also a risk that BT might not be able to grow its dividend in the long term. In fact, telecoms firms look under a bit of pressure in general.
Oh, and maybe that debt really could cause big problems in the future.
Diversified
Still, I’d include BT only as part of a diversified ISA. And I reckon I’d have a good chance of making a 7.5% dividend income every year. After that, any share price rises would be a bonus.
This brings me back to the question of whether I really would buy BT shares. My instinct still says no. I’m just not sure I could be happy holding a stock with that much debt.
But then, BT’s dividends cost the firm £750m in 2023. And that’s not a lot for a firm with £20bn in revenue and £5bn of capital expenditure. It would barely scratch the debt pile.
So, yes, maybe BT really can keep the dividends going strong for the next few decades.
