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BT isn’t the only cheap stock I’d buy for its stonking 7% dividend yield

Paul Summers

When it comes to seeking out stocks offering the best dividend yields, it’s not always the case that bigger is necessarily better. Indeed, a sky-high payout can often indicate that a company is in trouble and that a cut is imminent.

While the latter is not a given, it’s certainly true to say that times have been better at communications giant BT (LSE: BT-A). An accounting scandal in Italy, increasing debt pile and a sizeable pension deficit have all weighed heavily on the share price that’s now almost 25% lower than this time last year. 

Given recent performance, it was perhaps inevitable that CEO Gavin Patterson — whose growth strategy of entering the mobile and sports broadcasting markets is still to truly pay off — would go. For many holders, last month’s restructuring plan and the cutting of 13,000 jobs to release cash for investment was a case of too little, too late.

Nevertheless, a recent spate of director buying would suggest that Patterson’s soon-to-be-former colleagues are confident that better times lie ahead for the FTSE 100 behemoth. Although this is unlikely to generate a recovery on its own, the fact that directors are putting their own money on the line is a positive development.

Broker Jefferies is bullish on the company, stating that Patterson’s decision to step down later this year after five years in the role — along with the company’s goal to bring faster internet connection to 3m homes by 2020 — would likely ease pressure from regulator Ofcom. Although there can be no guarantee that the company won’t take a knife to the 7% dividend payout at some point (especially if more capital expenditure is required), I’d be surprised if any cut was especially severe.

For patient, income-focused investors pursuing the simple but effective ‘receive, reinvest, repeat’ strategy, I continue to believe that BT, at just 8 times earnings, is a bargain worth picking up.

Another dividend cracker

FTSE 250 constituent Saga (LSE: SAGA) is another company whose share price performance has been poor over recent times. Valued at 200p exactly one year ago, the stock fell off a cliff last December as the business warned on profits as a result of a “challenging trading environment” and increased investment.

Although some might fear for the dividend in such a situation, more recent trading suggests a cut isn’t on the cards.

According to today’s pre-AGM update, the company — which specialises in providing services to the over 50s — has traded in line with its expectations over the first four months of its financial year. 

While total retail insurance policies for the period were flat, “good momentum” was seen in Saga’s motor and home insurance policies, rising 30% and 14%, respectively. Elsewhere, Saga’s underwriter “continues to perform well“, despite the Beast from the East causing disruption in the UK in March. Tour bookings for 2019/20 may have been flat year-on-year, but bookings for the company’s new cruise ship have now surpassed 55% of management’s sales target for the first nine months from June 2019. 

Priced at a little under 10 times forecast earnings before today, I continue to believe that the market has been a little too harsh on the stock. True, the shares are unlikely to soar based on today’s numbers but, like BT, I think a forecast and fairly secure-looking 7% dividend yield, makes Saga well worth a look.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.