When searching for stocks and shares to form the basis of a passive income portfolio, the telecommunications sector looks appealing. And BT (LSE: BT.A) shares have plenty of appeal at the moment.
Companies in this industry tend to have relatively stable cash flows as clients sign up for long-term contracts. Due to the significant sums required to build networks, there also tends to be limited competition in the industry.
However, BT lost its crown as an income champion in 2020. Management decided to cut the corporation’s dividend at the beginning of the pandemic. This seems to have been the right decision at the time. And nearly two years later, it looks as if the company has the potential to regain its crown as a passive income champion.
Blue-chip income stock
BT’s income plunged during the pandemic, but the company is now on the road to recovery. Analysts believe the business will report a net profit of £1.8bn for its current financial year (2021/22), up from £1.7bn from fiscal 2019/20 (the firm’s financial year runs until the end of March).
Thanks to this growth, management is promising a higher dividend. Based on its own forecasts, analysts are projecting a dividend of 7.7p per share in the current financial year. This could give a dividend yield of 4% on the current share price.
With the company on track to earn £2bn in fiscal 2022/23, there is plenty of room for this dividend to grow further, although I would not take growth for granted.
BT is having to deal with several significant challenges which are placing pressure on its cash flows. It has a multi-billion pound pension deficit, colossal debt pile, and rising capital spending obligations, due to the rollout of fibre broadband across the country.
Another significant risk the organisation faces is rising interest rates. These could increase the company’s cost of debt and reduce the amount of cash available for distribution to investors.
BT shares for passive income
Even after taking these risks into account, I think BT has plenty of appeal as a passive income investment. The company remains the largest telecommunications business in the UK. This gives it a large and stable market. It is also investing heavily to build consumer trust and grow customer numbers.
If the enterprise can maintain this growth, while continuing to reinvest in the customer offering and upping its dividend payout, I think BT shares could make a great addition to my portfolio.
That said, I plan to own the stock as part of a diverse passive income portfolio. With a yield of just 4%, the shares are not the highest yield on the market. There are other companies with yields of 6% or more I can also buy.
I think a combination of these income stocks could provide the best outcome for my passive income portfolio.
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Rupert Hargreaves 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.
