BT (LSE:BT.A) shares have been one of the more surprising performers on the FTSE 100 over the last couple of years. The telecoms stock has climbed over 80% since May 2024 as new chief executive Allison Kirkby makes real progress on the company’s long-running restructuring.
And yet even after that impressive run, the shares still offer a 4.3% dividend yield today, nearly 50% more than the 3% offered by a typical FTSE 100 index fund. So should I be considering BT for my income portfolio?
The income case is getting stronger
The headline numbers from its 2026 fiscal year (ended in March) are genuinely encouraging. Pre-tax profits rose 8% to £1.4bn, and BT hit every single one of its financial targets for the year
More importantly for income investors, the full-year dividend was raised to 8.32p per share, and the board has now adopted a formal policy to grow the payout by low-to-mid-single-digit percentages every year going forward.
That’s a meaningful commitment from management. And it’s backed by a clear cash trajectory with normalised free cash flow expected to hit £2bn in the 2027 fiscal year and £3bn before the end of the decade. For reference, normalised free cash flow currently sits near £1.5bn.
Meanwhile, the group’s transformation plan’s running ahead of schedule. Management’s already delivered £1.5bn in gross annualised cost savings and has subsequently increased the overall savings target to £3.7bn.
At the same time, the business is also hitting critical operational milestones, with full-fibre broadband now covering more than two-thirds of UK homes.
In other words, BT’s simultaneously expanding its telecoms empire and becoming more efficient in the process. That definitely bodes well for long-term dividend sustainability. So is this a top-notch income stock, or is there a catch?
What’s holding BT shares back?
Despite the improving trajectory, there are a couple of risk factors worth flagging and the biggest and long-standing issue is BT’s substantial obligations.
Net debt currently stands at £20bn, and the pension deficit has nudged up to £4.2bn. That’s a significant financial burden, and it’s the main reason the dividend policy’s explicitly tied to reaching a BBB+ credit rating before any enhanced shareholder returns are considered.
Another point of contention is revenue growth, or rather the lack of it. Even with a rapid fibre and 5G rollout, total group revenues were actually down by 3%. And looking to the 2027 fiscal year, this downward trajectory’s expected to continue.
The situation’s a little complex. But in oversimplified terms, BT’s ageing legacy voice business is shrinking faster than the newer fibre and mobile products can replace it. And there’s a good chance this trend will continue into the future, before an inflexion point can be reached.
So what should investors make of all this?
What’s the verdict?
BT shares aren’t a shortcut to explosive growth. The company’s in the middle of a genuine transformation, making real progress, and now offering investors a rising dividend backed by a clear and credible cash flow plan.
However, debt reduction remains the ultimate priority for management. That’s definitely prudent. But for income investors who are interested it will demand patience. And in the meantime, there are other income stocks offering far more attractive cash-covered yields today, such as…
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Zaven Boyrazian does not hold any positions in the companies mentioned.
