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Why the Telstra dividend might be better than you think

Telstra Corporation Ltd (ASX: TLS) shares have always been famous for their dividends – one way or another.

If you wind the clock back a few years, it was all about that yield. Telstra shares used to be known for consistently paying a grossed-up double-digit dividend, which seemed too good to be true. For a long time, it wasn’t.

And suddenly, it was.

In 2017, Telstra became the pariah of dividend investors everywhere when it halved its cherished payout. Telstra shares were going for over $6 back in 2015, but by mid-2018 Telstra shares were at an all-time low of $2.62 – a double-whammy for investors who now had to deal with an enormous capital loss on top of a stunted dividend.

The NBN wrecking ball had cleaved a crater in Telstra’s balance sheet. Suddenly, the lucrative (and monopolistic) copper network that Telstra had been able to leverage for decades was gone, replaced by a level playing field in the Australian telco space for the first time.

What does Telstra’s dividend look like today?

The Telstra of today is a vastly different beast than the Telstra of old. However, the company’s dividend remains a focal point for investors. This year, Telstra has paid out a dividend of 16 cents per share. On today’s share price, this equates to a yield of around 4.55% (or 6.5% including full franking) – not a bad bag in today’s low interest-rate world.

But here’s why I like this yield. Telstra earns most of its money from selling smartphones, mobile plans, data and internet services. These products are pretty much essential for modern living – it would take a lot more people to give up their data and phones today.

If we do get hit by a recession or slowdown in the next few years, I would expect most big dividend payers like Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP) would have to trim their shareholder payouts. Most businesses are cyclical – meaning than earnings are vulnerable to a slowdown in economic activity.

I think Telstra is more or less immune from this cyclicality for the reasons outlines above. Therefore, it’s a stock I would feel comfortable owning in all economic weather. For me, it certainly does make Telstra’s dividend look much better on closer inspection!

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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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