Should you buy Telstra (ASX:TLS) shares in October for the dividend yield?

Is the Telstra dividend a good option for income investors?

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The Telstra Corporation Ltd (ASX: TLS) dividend is traditionally one of the most popular options on the Australian share market for income investors.

This has made the countless dividend cuts over the last decade very disappointing for the telco giant’s shareholders.

The good news, though, is that the outlook for the Telstra dividend has improved greatly this year.

What’s the outlook for the Telstra dividend?

According to a recent note out of Goldman Sachs, its analysts believe the Telstra dividend has reached its bottom at 16 cents per share. This is due to its improving performance, the new T25 strategy, and its strong free cash flow.

Based on the current Telstra share price of $3.85, this will mean an attractive fully franked yield of just under 4.2%.

But it gets better. Pleasingly, after years of cuts, Goldman believes it won’t be long until the Telstra dividend starts to grow again.

It is forecasting 16 cents per share dividends for FY 2022 and FY 2023, before an increase to 18 cents per share in FY 2024. After which, the broker has pencilled in a 19 cents per share dividend in FY 2025. It also suggested there’s upside potential in FY 2024.

The good news is that this won’t even come at the expense of growth. Goldman notes that management still intends to invest its free cash flow in growth opportunities.

It commented: “Telstra also revised its dividend policy back towards 100% of EPS, as it prioritizes growing franked dividends over time, while using the c.$600mn p.a. (c.5¢ps) of additional FCF to invest for growth or return to shareholders. On-market buybacks & un-franked dividends were highlighted, but we expect buybacks to be prioritized given the focus on growing franked dividends.”

Is the Telstra share price good value?

As well as offering generous dividends, the Telstra share price could offer decent upside for investors.

Goldman has a buy rating and price target of $4.40 on its shares. This implies potential upside of 14% over the next 12 months or 18.5% including the Telstra dividend.

Food for thought for income investors.

Should you invest $1,000 in Telstra right now?

Before you consider Telstra, you'll want to hear this.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. 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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