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Should you buy Telstra?

Investors anticipating a rate cut at the RBA’s next meeting in August, have begun buying up high-yielding blue chip stocks like Telstra (ASX: TLS), but is it now too expensive?

Telstra’s share price, like that many other blue chips with high yields, has edged higher in the past month as investors try and take advantage of another surge in share price and buy up a steady dividend yield.

As the cash rate lowers, equity and property markets become much more enticing and in April we saw prices inflate higher than reasonable and sustainable only to come crashing down in May. However, we’re starting to see a climb in prices of both property and Aussie blue chip stocks that pay dividends around 6% fully franked.

In the last week, Westpac (ASX: WBC), Telstra and NAB (ASX: NAB) all finished in positive territory as the benchmark S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) rose considerably in a matter of days.

Telstra has risen over 29% in the past year on the back of solid prospects stemming from the NBN and a restructure. Management has been active in cutting costs and in past weeks we’ve witnessed the potential job losses of 170 skilled workers around the country.

Investors regularly buy Telstra for its solid dividend yield and safety. However, the market is also betting on some growth in the stock and hope the company echoed results it achieved in the first half to 31 December 2012 in the second period.

In addition to modest growth rates, analysts are calling on Telstra to increase its dividend by 1 cent every year until 2015. Many believe that slowing growth rates should be countered by solid dividend increases, which would maintain the stock’s price.

Foolish takeaway

At current prices, Telstra pays a dividend of 5.8% fully franked, but the market has weighed in on the share price with a higher price to earnings. There are both higher yielding and better growth opportunities available on the market, but Telstra is a ‘core’ stock and should be considered as such. If you buy and hold for the long term, Telstra’s dividend will reward you for your patience and it’s in an industry consumers are becoming more reliant upon every day.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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