Telstra Corporation Ltd (ASX: TLS) is a rock-solid dividend stock.
After all, it's the market leader in the provision of telecommunication networks upon which almost all modern communications are run.
It's got wide profit margins, around 40% in its 2015 financial year; a low cost of capital, enabling it to generate enviable cash flows from new and existing investments; and a big dividend yield.
In fact, at its current share price of $5.61, Telstra shares yield 5.4% fully franked, or an enormous 7.76% grossed-up. So it's plain to see. There are plenty of reasons to hold Telstra shares in a long-term Australian share portfolio.
However, there are also risks to investing in Telstra shares…
Data sourced from Yahoo! Australia.
…which are exemplified by the 11% decline in share price over the past month.
While much of the selloff may be attributable to declines in the broader S&P/ASX 200 (ASX: XJO) (Index: ^AXJO), such a retraction in share price can quickly wipe out the perceived benefits of its dividend yield.
Therefore, the trick is to focus on the long term. And over such a time frame Telstra stands out as one of the better income stocks on the ASX.
For example, Telstra's cash windfall from the government's NBN Co is set to start rolling in, enabling its Asian expansion strategy to be well funded. That'll be coupled with Australia's rising use of internet enabled devices.
What is Telstra worth?
Like all good investment decisions, getting value for your money is vital.
And following Telstra's recent annual profit result, I think a conservative fair value estimate for its shares lies between $6.40 and $6.50.
At their current price of $5.61, you may be inclined to think it is a bargain. However, it's imperative to buy shares with a healthy margin of safety.
I personally think a margin of safety of 30% between what we can buy a stock for (i.e. the market price) and what it's worth (our 'fair value' estimate), is a good starting point. Therefore, Telstra shares would need to drop to around $5 before I'd start backing up the truck. That is, $1.50 (the required margin between the theoretical worth of the stock and the market price) divided by $5 equals 30%.
In saying that however, I do not think much harm would be done if an investor wanted to start building a position in Telstra at these levels. After all, you can always buy more when it gets to $5!
