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Is Telstra Corporation Ltd’s HUGE dividend an opportunity?

Telstra Corporation Ltd (ASX: TLS). Australia’s biggest telco. Dividend stalwart. Favourite of Aussie income investors. Or, for a certain subset of the population (Tranche 2 investors), highly detested capital loss.

Telstra’s got a lot going for it, including its size, the quality of its coverage (recent outages notwithstanding) and a willingness to invest in new ventures. It also pays a 6% dividend, with franking credits on top. Unfortunately, some of these attributes – particularly its size and its dividend – are starting to work against it.

As the biggest market player, it has very little room to expand organically. There’s not a lot of growth on the cards and, although there are several smaller ventures with promise, it could be many years before they become a more meaningful part of Telstra’s earnings. In the meantime, Telstra relies on its mobile phone sales and network bundles.

Once the construction work on the National Broadband Network finishes, Telstra will experience a ~$2 billion hit to earnings that it will struggle to replace. Additionally, it has announced plans to spend billions reinvesting in its network, and the company’s significant debt burden is expected to increase further in coming years.

With all these factors in play, I find it hard to see an opportunity in Telstra today – even for the dividends. Higher capital expenditure and lower earnings could place pressure on the company’s dividend. I’d prefer to invest in smaller telcos like TPG Telecom Ltd (ASX: TPM) or Vocus Communications Limited (ASX: VOC), which I feel offer greater opportunity today.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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