Owning dividend shares can be a great way of earning a second income. And the FTSE 100 has some terrific choices for investors to consider.
Shares in BT Group (LSE:BT.A) are up 25% this week as the company announced significant restructuring plans. But the stock could still be worth considering with a 5.76% dividend yield.
A £10,000 second income
Right now, BT distributes 8p per share in dividends. That means earning a £10,000 second income would involve buying 125,000 shares.
At today’s prices, that would require an outlay of around £168,000. That’s a lot, but there are a few reasons for investors looking at the stock to be optimistic.
One is that this can be invested over time – £168,000 amounts to £466 per month for 30 years. Another is that reinvesting the dividends received along the way can contribute to this.
The biggest reason, though, is that BT can increase its dividend over time. And if the new CEO’s plan comes off, the increase could be dramatic.
Cost reductions
Allison Kirkby has been in charge of BT since February and the stock is up 30% since then. And the new CEO thinks the outlook for the company is bright.
BT operates in a capital-intensive industry. The cost of building out the UK’s fibre optic network through its Openreach subsidiary has been weighing on its profits.
However, it seems that the peak of the investment cycle has passed. The company has now entered a phase of cutting costs, with £3bn in reductions announced earlier this week.
That’s positive for BT’s earnings – and more importantly, its cash flow. Over the next five years, free cash flows are set to double, which could lead to a significantly higher dividend.
Scepticism
Not everyone is buying it, though. An inflationary environment is tough for businesses with high capital intensity and BT’s share price is down 34% over the last five years.
Arguably, though, this isn’t the biggest problem with the company. Despite its significant cash requirements, BT is facing significant competition.
The number of customers subscribed to its Openreach broadband plans has been coming down. And the business is also losing market share in broadband lines.
To offset this, BT will need to raise prices to customers. But whether or not it can do this without accelerating the rate of customers migrating away is another question.
Time to buy?
If BT can double its free cash flows in the next five years, the stock looks like a bargain. In any event, the 5.76% dividend yield is attractive even with interest rates at 5.25%.
Obviously, the stock was more attractive when it was 20% cheaper a week ago. But with cost reductions starting to come through, this could be worth keeping an eye on.
