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Is the BT share price heading for a 10% dividend yield?

Peter Stephens
A stock price graph showing declines

Having fallen by 57% in less than three years, BT (LSE: BT.A) now has a dividend yield of 7.6%. This is more than three times the current rate of inflation and is almost twice the dividend yield of the FTSE 100. These comparisons put into perspective how appealing the stock may seem to income investors on a relative basis.

With the stock seemingly in freefall, though, many investors may wonder if an even higher yield could be obtained over the medium term. After all, the company’s problems don’t seem to have gone away. As such, could BT offer income appeal right now? Or should investors look to another high-yielding stock that released a positive update on Wednesday?

Uncertainty

Perhaps one word can best summarise the outlook for BT at the present time: uncertain. The company is making huge changes to its business model and management at a time when the quad play sector is also evolving.

For example, it’s set to have a new senior management team in place by the end of the year, is in the process of delivering further changes to its structure after a prolonged period of restructuring, while competition within pay-tv, mobile and sports rights continues to increase.

As a result, it’s difficult to ascertain how the company will perform over the medium term. New management teams often seek to make changes and this could lead to current forecasts being changed dramatically over the coming months. As such, buying the company now could prove to be a risky move – especially for investors who are seeking a high-income return.

Clearly, if the BT share price continues to move lower, its dividend yield will rise. Given its continued downward trend, a fall of 25% so that it trades at 160p per share would not be a shock to investors. In such a scenario it would yield 10% if dividends are not cut. As a result, and while it may eventually have income appeal, it seems to be a stock to avoid at the present time.

Improving prospects

While BT may lack income-investing potential, another stock with a high dividend yield reported positive results on Wednesday. Structural steel company Severfield (LSE: SFR) saw revenue grow by 5% to £274.2m in the full year to 31 March, with underlying profit before tax rising by 19% to £23.5m. Its strong cash performance meant that year-end net funds were up to £33m, while dividends per share moved 13% higher.

The company currently has a dividend yield of 3.6%. While lower than a number of FTSE stocks, it’s forecast to post a rise in dividends of 11% in the next financial year. And with dividends being covered 2.4 times by profit, there seems to be scope for further growth over the medium term.

With Severfield forecast to grow its bottom line by 10% next year, it seems to be performing well from a business perspective. Its price-to-earnings growth (PEG) ratio of 1.2 suggests that it could also offer capital growth potential alongside its impressive income returns.

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Peter Stephens 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.