The dividend yield on Telstra Corporation Ltd has just hit 10% but don’t get excited yet

Dividend-loving investors find it hard to look past the likes of Australia’s largest telco Telstra Corporation Ltd (ASX: TLS) with its gross yield surging to 10% if franking credits are included!

The yield is around 7% without franking and that must be a multi-year record high for the stock although I am really putting a very positive spin on the fact that its share price has crumbled to fresh seven-year low (price and yield move in opposite directions).

But if history is any guide, investors should beware stocks bearing double-digit dividend gifts!

This is probably the clearest sign yet the Telstra is cum-dividend cut.

I remember a number of stocks offering such luscious yields as we were heading into the GFC. The lesson learnt from that experience was that when stocks trade at overly generous yields, it’s a clear sign that the market is pricing in a dividend cut.

Some brokers believe that fears over its earnings hole due to competitive pressure is overblown, and that 5G (the next generation of mobile internet) and the potential write-down in the value of the NBN will prove to be its saving graces.

I don’t buy that and think I am better off looking elsewhere for yield. There are some stocks that pay attractive dividends without the earnings headwinds that’s buffeting Telstra.

But I don’t think the big banks are the answer. If anything, I feel Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australian and New Zealand Banking Group (ASX: ANZ) have too much in common with Telstra.

The operating environment is hostile for the banks which are battling greater regulatory pressure, slowing credit growth, the Banking Royal Commission, margin pressure from widening credit spreads and higher bond yields and competition from non-traditional rivals.

In spite of these headwinds, the average consensus earnings per share (EPS) growth forecasts for the big four is 4.5% for FY19.

I think the banks can still find cost savings to help lift growth but I think there’s a risk that they are facing more downgrades in 2018.

This does not necessarily mean they are “cum-dividend cut” but I prefer my income stocks to have a cleaner earnings runway.

On that note, the experts at the Motley Fool have picked their favourite dividend paying stock for 2018. Click on the free link below to find out what this stock is and why it may be a superior option to Telstra or the big four banks.

OUR #1 dividend pick to grow your wealth over the new financial year is revealed for FREE here!

Financial year 2018 is here and The Motley Fool’s dividend detective Andrew Page has revealed his must buy dividend share to grow your wealth in 2018.

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.