Should you buy Telstra shares for the massive 7.5% dividend yield?

On Friday the Telstra Corporation Ltd (ASX: TLS) share price finished the week at $2.93, approximately 1.5% higher than where it started.

Based on its FY 2018 dividend of 22 cents per share and its closing price, this means that its shares provide a trailing fully franked 7.5% dividend yield.

This makes it one of the biggest yields on the Australian share market and even bigger than the yield on offer from the likes of Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA).

Should you snap up Telstra shares for its dividend?

While Telstra’s trailing dividend smashes the market and some of the banks, I’m not overly convinced it will be the same on a forward basis.

Because of this, I would suggest investors think twice about buying its shares purely for its dividend.

The reason for this is that many in the market are doubtful that Telstra will be able to generate sufficient cash flows to maintain its 22 cents per share dividend in FY 2019.

Although its Mobile business is booming and appears to have been winning market share this financial year, the rest of the business isn’t likely to be performing as well. Especially given the impact that high NBN wholesale costs could be having on its margins.

At Telstra’s annual general meeting CEO Andy Penn complained that the NBN is charging telcos $44.00 per month per customer and plans to increase this to $51.00 by FY 2022. As a comparison, Telstra charges its competitors the equivalent of $20.00 per month per customer for access to its network.

Unfortunately, given the heightened competition in the industry with everyone from TPG Telecom Ltd (ASX: TPM), Amaysim Australia Ltd (ASX: AYS), and even Ltd (ASX: KGN) battling it out for market share, increasing prices to make its NBN plans more profitable simply isn’t feasible.

What will Telstra’s dividend be in FY 2019?

Next month Telstra will release its half year results and reveal its interim dividend, so investors won’t have to wait long to find out.

But, based on notes out of Citi and UBS late last year, they believe the telco giant will pay a 16 cents per share dividend in FY 2019. If this is accurate then it means its shares offer a forward 5.5% yield at present, significantly lower than the trailing yield.

As I’ve said before, in the event of a dividend cut to 16 cents per share, I wouldn’t be surprised to see its shares pull back around 10% to ~$2.65, where they would then offer a 6% dividend yield. I think this is food for thought.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended ltd 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 Scott Phillips.

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