Why I'd dump BT Group plc's huge dividend for this fellow 6%+ yielder

Telecoms stocks such as BT (LSE: BT.A) have long been loved by investors for their high dividend yields and relative reliability compared to other big yielders like miners and oil majors. But with its share price down more than 25% in the past year, its already impressive dividend yield is now up to a whopping 6.4% - so should investors spring at the chance to buy this unloved mega yielder at an increasingly low valuation?

Well, the positive case for investment would be that BT is still highly profitable, EBITDA margins were 30.5% in the nine months to December, it has an incredibly wide moat to entry for competitors, it owns nearly all of the last mile phone and broadband connections in the UK, and it has impressive growth prospects as it pivots towards consumer-facing sectors such as mobile phone contracts and pay-TV.

Unfortunately, most of these positive arguments can easily be turned into negatives. Earnings, while still high, are moving downwards with adjusted EBITDA down 3% in the first nine months of the year to £5,422m. On top of this, revenue for the period was actually down 1% as its non-consumer-facing units continued to see sales declines.

While the consumer-centric businesses could pay off in the long term, I see a few reasons to worry. One is that buying the likes of EE and pushing into sports rights for BT TV has been hugely expensive and driven net debt up to £8,923m at the end of December. And unlike the company's core business, the group is now pushing into sectors with high and rising levels of competition. Indeed, in the nine months to December, revenue for BT Consumer was flat while EBITDA dropped 4% as management invested in improving customer service levels to attract new customers.

Then there is the company's cash cow and largest moat to entry for competitors - its ownership of Openreach. The division has margins near 50% and produces a third of overall group EBITDA, so increasing political pressure to spin the group off completely is a huge threat to BT, particularly as it needs Openreach's cash flow more than ever to support the consumer-facing expansion.

Smaller may be better

Given all these issues for BT, I'm much more likely to invest in another 6% yielder that is looking much healthier to me - point of sale terminal provider PayPoint(LSE: PAY). The company is far from a household name but you are likely to see its logo daily as it provides point of sale terminals and related services to some 29,000 corner shops and the like in the UK.

The group is growing at a steady pace by adding customers in the UK and Romania, adding to its array of bolt-on services such as ATMs, and introduces its new, higher cost PayPoint One terminal to retailers. In the group's Q3, net revenue was up 3.6% to £31.8m, which would have generated around £13.7m in operating profits if H1 margins of 43% held steady.

These sky-high margins and relatively low capex requirements mean management can return gobs of cash to shareholders, which is why its shares yield 9.8% including the regular and special payouts from last year. With a low valuation of just 10 times earnings, a giant dividend yield and decent growth prospects, PayPoint is one small-cap I'd love to own for the long term.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.