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Forget the BT share price! I’d rather own this FTSE 250 7%-yielder

Rupert Hargreaves
Man shuffling cards

The income investing appeal of BT (LSE: BT.A) increased dramatically after the general election and Labour’s threat of nationalisation receded.

A dividend yield of 8% suggests the stock could provide a passive income for its investors, while a price-to-earnings (P/E) ratio of just 8 implies its long-term total return prospects could be high.

However, the BT share price also has some weak points. For example, the company’s debt and pension deficits are sizable. Together they eclipse the group’s total market capitalisation.

At the same time, the firm is struggling to compete with younger, more agile peers, which are nipping at its heels in the broadband, pay-tv and telecoms market.

According to the City, these issues could cause BT’s earnings per share to decline by nearly 20% in its current financial year. Moreover, regulators want the company to invest billions more in infrastructure to help improve customer connectivity.

This additional capital spending, coupled with falling earnings, could put BT’s coveted dividend in jeopardy. As such, it might be better to avoid the share price for the time being.

A better buy

An income stock with a much brighter outlook is Hastings Group (LSE: HSTG). This is an up-and-coming insurance company that’s trying to leverage technology to achieve the best outcomes for its customers.

The strategy seems to be working. Hastings has grown rapidly over the past five years. Revenue has more than doubled since 2013 and net profit is expected to hit £106m for fiscal 2020, up from £41m in 2013.

As a relatively small enterprise in a large market, Hastings still has plenty of room to expand and snatch customers from larger peers. What’s more, unlike BT, which is continuously in the crosshairs of regulators due to its size and position in the UK telecoms market, Hastings has much more flexibility.

For example, regulators cannot insist the company spend billions on improving its capital infrastructure. Hastings still has to submit to regulators, but they’re more concerned about the group’s financial stability rather than customer service. That’s up to the management.

Income investment

Therefore, the company looks attractive as an income investment in the current environment. The stock supports a dividend yield of 6.7%, and the payout is covered 1.1 times by earnings per share.

The distribution to investors has grown by around 500% over the past four years, which bodes well for future growth and suggest the company can provide investors with a rising passive income for many years. The stock also has a P/E ratio of just 13.3, which insinuates that its total return prospects could be high.

Considering Hastings’ growth potential and the current level of income, it seems as if now could be the right time to snap up a share as the business grows its position in the market and delivers an expanding and sustainable passive income for its investors.

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Rupert Hargreaves owns no share 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.

Motley Fool UK 2020