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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.

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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.

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