BT Group (LSE: BT.A) shares have jumped 17% so far in 2024. Over one year, they’re up by an impressive 30%. That’s more than double the FTSE 100 on both counts.
Despite this rise, the stock’s offering a very respectable 5.5% dividend yield. Again, that trumps the FTSE 100’s 3.5% yield. Does that mean I should scoop up shares of the telecoms giant? Let’s discuss.
The passive income
As things stand, City analysts expect modest dividend growth from BT shares over the next couple of years.
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| Financial Year (ends March) | Dividend Per Share | Dividend Yield |
| FY24 | 8.0p | 5.5% |
| FY25 | 8.16p | 5.6% |
| FY26 | 8.34p | 5.7% |
Based on the anticipated yield, it means £10k invested in BT shares would bag me around £570 annually in FY26. However, due to small but steady increases, the yield could hit 6.5% by FY29 for investors buying the stock today.
Of course, a lot could happen in the meantime to change these forecasts. Dividends could be cut or cancelled. So I’d take them with a pinch of salt.
But even if dividends stagnate and fail to grow beyond FY26, I’d still get nearly £5,700 in dividend income over a decade. And £17,100 over 30 years.
Dividend reinvestment
Reinvesting dividends would make a big difference though. Thanks to the mathematical miracle of compounding, my shares would have generated £17,408 after 10 years. And a whopping £52,753 after three decades.
If I then cashed out and drew down 4% each year, I’d have an annual income of £2,110.
Past is no future guide
But do I really want to hold BT shares in my portfolio for 30 years? I mean, the last 30 years haven’t exactly been great, with no growth in the share price or annual dividend.
Indeed, I notice the 8p per share dividend is still less than the 15p it was dishing out before the pandemic.
Perhaps I’m being too harsh. BT’s passed peak capex on its full-fibre broadband rollout. With this, and the continued emphasis on efficiency and cost-cutting, brokers see nearly £2bn in free cash flow by 2028 — a significant jump from the £1.3bn generated last year.
By then, we could be looking at a 9%+ free cash flow margin, up from 6.1% last year. In theory, margin expansion should support both share price and dividend growth.
I note the consensus share price target among analysts is 200p — around 38% higher than current levels. I think that’s a realistic possibility.
Should I invest?
Of course, the elephant in the room here is BT’s elephantine debt pile of nearly £20bn. For context, that’s significantly more than its £14.4bn market-cap and on par with its annual revenue.
Debt and interest payments are obviously set to be significant for many more years. Presumably, this is why the dividend’s expected to increase modestly, at 2-3% a year, despite the much stronger free cash flow generation.
Meanwhile, revenue’s forecast to be £20.8bn in 2027, the same figure as last year. So the firm’s been investing heavily just to stay still in a mature industry.
Weighing things up, I prefer other dividend stocks for passive income.
