The S&P/ASX 200 Index (ASX: XJO) stock Telstra Group Ltd (ASX: TLS) could be a smart choice for dividend investors looking for passive income.
Telstra has long been regarded as an ASX dividend share by some investors.
Whilst it has paid a high dividend yield for a long time, I've been cautious about businesses that aren't growing their earnings because it could mean that a dividend cut occurs. Telstra ended up cutting its dividend in FY18 and FY19.
But, pleasingly, dividend growth has returned to the telco, and it appears likely to continue.
With that positive outlook for passive income, I think the business could be a good one to consider for a contender to generate $400 in monthly passive income.
Telstra's potential to pay good passive dividend income
The ASX telco share doesn't pay a dividend each month, it actually pays one every six months. So, for our purposes, we're going to calculate an annual amount which can then be divided into 12 equal parts.
Receiving $400 per month would translate into $4,800 of annual passive dividend income.
That's quite a lot of dividends.
But, it helps that Telstra has a pretty high projected dividend yield for FY23 and beyond.
According to Commsec, Telstra shares are expected to pay an annual dividend per share of 17 cents. At the current Telstra share price, that represents a grossed-up dividend yield of 5.75%.
Based on trying to receive of $4,800 of annual income, investors would need to buy 28,236 Telstra shares.
The telco is then expected to grow its dividend to 18 cents per share in FY24 and then another increase to 19 cents per share in FY25.
If Telstra does keep increasing its dividend to FY25, then investors would need to own 25,264 shares to gain $4,800 of annual passive dividend income in FY25.
Will these payments happen?
Dividends are not guaranteed. Forecasts are just estimates, so the dividend payments could be smaller, or bigger, than expected.
Telstra is working on a number of initiatives to grow its profit in the coming years with its T25 strategy. It wants to reduce its costs, have the best 5G network and grow its margins for investors.
If the company is able to achieve these things, then I think the dividend can keep steadily climbing.
