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What’s holding you back from Telstra Corporation Ltd’s 7% fully franked dividend?

At today’s share prices, Telstra Corporation Ltd (ASX: TLS) is expected to pay a 7% fully franked dividend yield. That means, if you are an Australian shareholder and hold shares for the next year, you could receive a dividend yield equivalent to 10% grossed up!

What’s holding you back from Telstra?

Of course, it’s not that easy to pick and choose ASX shares. If it were, we would let the computers do it for us!

Telstra is facing its fair share of risks, including the rise of new competitors on the NBN, from TPG Telecom Ltd (ASX: TPM) and others pushing aggressively into the mobiles market, and a lack of growth potential.

For example, the NBN is rumoured to have more than 100 resellers. It’s easy to see what Telstra’s dominance might be challenged. However, Telstra’s fixed services like broadband and home phones have been under pressure for many years, so it’s nothing new. Plus, Telstra is being paid by the Government to give up its 100-year old copper cable network.

However, Telstra’s fixed services like broadband and home phones have been under pressure for many years, so it’s nothing new. Plus, Telstra is being paid by the Government to give up its 100-year old copper cable network.

In mobiles, Telstra charges a premium for its services because it has the best network coverage and fastest service. As the largest provider of mobile plans, it can also use its muscle to get access to the latest devices and technology, something which many consumers are willing to pay the premium for.

But Telstra’s limited growth prospects are arguably the biggest threat to shareholders over time.

Indeed, the company continues to pay a big dividend despite questions continually being asked as to how it can grow profits meaningfully over the long run. The company’s Network Application Services (NAS) business is growing at impressive rates, however, it may struggle to offset declines in its other businesses, such as Foxtel.

Foolish Takeaway

It can be great to receive a big fully franked dividend to supplement your income. However, if you are investing for the long term it’s vital to consider the underlying drivers of the business and whether or not the dividend can be sustained or grow over time. Personally, I would rather forgo a big dividend now in exchange for a growing business that will pay a larger dividend in the future.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of Telstra Limited and TPG Telecom 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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