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Why you shouldn’t bank on Telstra Corporation Ltd’s dividends

Telstra Corporation Ltd (ASX: TLS) shareholders should be both alert and alarmed. The high-yielding telco could be facing a massive disruption to its business if an article in the Australian Financial Review is anything to go by.

The article looks at what is happening in India and the US where unlimited mobile data is the norm due to hungrier market entrants that are willing to go to extraordinary lengths to win market share.

The new entrant in Australia is TPG Telecom Ltd (ASX: TPM) after the company paid $1.3 billion to secure mobile spectrum two months ago.

In India the Indian conglomerate Reliance Industries spent US$25 billion rolling out a 4G network and offered free mobile services in September last year. It signed up 100 million new subscribers in the first 170 days, according to the article.

What’s more impressive is that Reliance still managed to sign up 72 million customers after it started charging for its services in April this year. The most popular plan is the unlimited voice and data package, although only the first 1GB of data is at the faster 4G speed.

It’s anyone’s guess what TPG will do when it starts operating its mobile service, but it shouldn’t surprise anyone if it took on some, if not all, of this aggressive tactic. After all, TPG didn’t cough up for mobile spectrum just to play by the existing rules set out by incumbents Telstra, Optus and Vodafone.

This will be alarming to Telstra shareholders as mobile is arguably the most important money spinner for Telstra and a key source of funds for dividend payments.

The listed-telco space used to be an attractive port of call for income investors due to the sector’s reasonably high and dependable dividend payments. That could well be set to change and we are already seeing the start of this given the recent performance of TPG and Vocus Group Ltd (ASX: VOC).

Dividend-hungry investors shouldn’t be swimming in this sector.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. 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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