Why I'd trade in BT Group plc for this 5% yielder

bt telephone box
bt telephone box

When it comes to dividends, BT(LSE: BT.A) is regularly cited as being one of the FTSE 100's top stocks. However, I believe that there's a better option out there, as this large-cap faces increasing pressure on its margins.

Profit squeeze

BT is facing fire from all side. Pensioners, regulators, competition and customers are all calling for the company to lower costs, improve efficiency and spend more cash on paying down liabilities.

Still, it's not all bad. The group's mobile division, which was bulked up by the purchase of EE last year, reported EBITDA growth of 17% during the first half. A rise in the number of contracted customers marginally offset a fall in pay-as-you-go, leaving the total at 29.7m. This was the only bright spot though. Overall revenues were flat, and group EBITDA declined by 3%. Meanwhile, free cash flow dropped 7%, net debt remained broadly flat on last year, at £9.5bn and the net pension deficit rose slightly to £7.7bn.

To try and return the group to growth, management is embarking on a cost-cutting drive, which is expected to cost around £1.5bn (including regulatory fines).

It remains to be seen how much of an impact these changes will have on the bottom line, but I believe BT's decision to rebase its dividend growth is only just the start. After previously promising to increase the payout by 10% per annum, management has now adopted a "progressive approach." Considering all of the headwinds currently facing the company, this means that the outlook for the dividend is uncertain.

It looks as if the market agrees as the stock now yields 6.3%, which indicates that investors are already pricing-in a dividend cut.

A better buy than BT

There are better-looking dividend buys out there. CMC(LSE: CMCX) is one example. Unlike BT, the company is not burdened with over £10bn of debt and pension obligations, and the business is highly cash generative.

Even though part of the business is under threat from a regulatory crackdown, management's decision to refocus on higher value clients is paying off.

For the six months to 30 September, pre-tax profit lept 58% thanks to an increase in revenue per client of 22%. As the number of active clients also declined 2% over the same period, it looks as if CMC's high value client drive is paying off. Also, during the period the number of trades made by clients only increased by 1% to 30.7m but the value of trades placed exploded by 29%.

Management has held CMC's interim dividend payout at the same level as last year (3p per share) following these results, putting the firm on track for a full-year dividend of 8.9p, or yield of 5.2%. I believe that's it's only a matter of time before this distribution is increased.

If the group repeats its first-half performance, for the full year, it is set to earn around 18p per share, covering the dividend twice. Also, the firm's net cash position at the end of the year was approximately £22m, giving a significant cushion for dividend growth. Considering these numbers, I believe that the stock is a better dividend buy than BT.

Interested in growth stocks?

CMC looks to me to be a top-quality income and growth stock but it isn't the only company out there with these qualities.

Indeed, there's another company out there that looks to me to be a top buy for small-cap income and growth investors.

This company has already achieved an impressive record of growth, but our analysts believe gains of more than 50% are still possible.

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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.