Telstra stock pays a massive 7% dividend, and now could be a great time to buy

The dividends from Telstra could be very rewarding in the coming years.

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Telstra Group Ltd (ASX: TLS) stock is regularly viewed as an appealing ASX dividend share to own. This could be a compelling time to consider the company for its passive income and dividend potential.

Businesses that are able to deliver growing earnings can achieve both a rising share price and afford growing dividend payments.

The latest news from Telstra is exciting for shareholders because of what it could mean for revenue, net profit after tax (NPAT) and the potential payouts.

The company announced it would increase the prices for most pre-paid and postpaid mobile plans by between $2 and $4 per month. Telstra justified this decision by saying it needs to continue to "invest to manage the technology evolution and continued strong customer demand on its mobile network."

The telco noted traffic on Telstra's mobile network is growing by approximately 20% per annum.

Why this makes Telstra stock appealing

The Australian reported that Goldman Sachs analyst Kane Hannan reiterated his buy rating on Telstra stock after seeing the price increase news. The analyst said this, combined with the recent Optus price increase, suggests that the telco market remains "rational".

Goldman Sachs reportedly said the Telstra mobile earnings growth "remains strong", thanks to subscriber and average revenue per user (ARPU) growth.

Hannan said there are flexibility benefits to the plans no longer being linked to CPI inflation because the core plan prices could experience price rises faster than CPI, while the price-sensitive starter plans can avoid price increases if Telstra decides to do so.

Goldman Sachs now thinks Telstra will increase its profit guidance range from $8.5 billion to $8.7 billion, up from between $8.4 billion to $8.7 billion.

Meanwhile, Macquarie decided to increase its dividend forecast for Telstra stock to 9.5 cents for the first half of FY25 thanks to the better-than-expected mobile price rise.

How big is the dividend yield?

If Telstra were to pay 9.5 cents per share for the interim and final dividends in FY25, this would translate into an annualised payout of 19 cents per share.

At the current Telstra stock price, this would translate into a fully franked dividend yield of around 5% and a grossed-up dividend yield of approximately 7%.

As a starting yield, I think that's a very good level of income, and there's potential for ongoing dividend growth if Telstra's mobile subscriber numbers keep rising. I believe the telco can deliver pleasing shareholder returns in the medium term.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group and Telstra Group. 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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