Image source: BT Group plc
Owning dividend stocks can be a great way to earn a second income. And the FTSE 100 has some great options for investors to consider.
Actions in BT Group (LSE:BT.A) are up 25% this week as the company announced major restructuring plans. But the stock could still be worth considering with a dividend yield of 5.76%.
A second income of £10,000
Currently, BT distributes 8 pence per share in dividends. That means earning a second income of £10,000 would involve buying 125,000 shares.
At current prices, that would require an outlay of around £168,000. That's a lot, but there are some reasons for investors watching the stock to be bullish.
One is that this can be invested over time: £168,000 is equivalent to £466 a month for 30 years. Another is that reinvesting dividends received along the way can contribute to this.
However, the main reason is that BT can increase its dividend over time. And if the new CEO's plan goes ahead, the increase could be dramatic.
Cost reductions
Allison Kirkby has been in charge of BT since February and the shares have risen 30% since then. And the new CEO believes the outlook for the company is bright.
BT operates in a capital-intensive industry. The cost of building the UK's fiber optic network through its subsidiary Openreach has been weighing on its profits.
However, it appears that the peak of the investment cycle has passed. The company has now entered a cost-cutting phase, with £3bn in reductions announced earlier this week.
This is positive for BT's profits and, more importantly, its cash flow. Over the next five years, free cash flows will double, which could lead to a significantly higher dividend.
Skepticism
However, not everyone believes it. An inflationary environment is difficult for highly capital-intensive companies and BT's share price is down 34% in the last five years.
However, this is arguably not the company's biggest problem. Despite its significant cash needs, BT faces significant competition.
The number of customers subscribing to its Openreach broadband plans has been decreasing. And the business is also losing market share in broadband lines.
To compensate for this, BT will need to increase prices to customers. But whether or not you can do this without accelerating the rate of customer migration is another question.
Is it time to buy?
If BT can double its free cash flows over the next five years, the stock looks like a bargain. In any case, the dividend yield of 5.76% is attractive even with interest rates of 5.25%.
Obviously, the stock was more attractive when it was 20% cheaper a week ago. But as cost reductions begin to emerge, it might be worth keeping an eye on this.