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I’m investing £500 in this high-dividend-yielding FTSE 100 stock in 2020

Manika Premsingh
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These aren’t the best times for some of the biggest FTSE 100 companies if you go purely by their share price performance. But it’s exactly because of this that they can provide appreciable income on our investments. A case in point is the telecom services provider BT Group (LSE:BT-A), whose share price has trended downwards for much of the past five years.

Low share price, high dividend yield

At the last close, its price was 9% lower than a year ago and down by over 37% from five years ago. But as long as the company is prepared to maintain its dividends, a lower share price actually means a higher dividend yield for investors. That’s exactly what has happened with BT. It has maintained its dividend at 15.4p per share for the last three years as the share price has dropped, but its yield has risen from 4.8% in 2017 to 6.9% in 2019. And in the present financial year, its yield stands at an even more impressive 8.1%. 

Before making an investment based purely on this high yield, however, I’m inclined to consider why the share price is falling in the first place, especially since it’s a secular decline over a fairly long time period. We don’t need to look much further than its half-year results to get the story. The financial update showed a decline in revenues as well as profits. And its outlook for the full year remains unchanged as well, with the expectation of continued weakness in performance.  

Expectation of stability 

Yet I see positives as well. For one, it maintained its interim dividend at 4.62p, the same as last year. While it remains to be seen whether it will keep  the final dividend at last year’s level when it’s announced in the first week of February, I’m optimistic. This is because the company has a history of either sustained or growing dividends in past years. And this is despite the fact that last year too, its revenues had fallen.  

The difference, though, is that back then, it had reported an increase in profit. But up to the first half of this year, that measure has remained flat. Based on this, even if we assume that it might cut the actual dividend amount, it’s entirely possible that the yield still remains ‘high’. For instance, if its annual dividend is reduced significantly to 9p (which, I don’t think will happen, but makes a good level merely for explanation), its yield at today’s share price is still 4.7%. While this isn’t huge, it’s still bigger than the FTSE 100 average yield of 4.3%. Besides this, BT seems to be making progress in getting back on track and its efforts could pay off in the years to come. This suggests that a financial turnaround, and therefore stability in actual income as well as capital appreciation, are both possible.

I think it’s a cautious buy even now, but I’d wait for it to announce its dividend in February just to be doubly sure.  

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Manika Premsingh 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.

Motley Fool UK 2020