Telstra Corporation Ltd (ASX: TLS) shares are forecast to pay a fully franked dividend equivalent to 7.6%!
Is Telstra's dividend safe?
On face value, the recent fall in the Telstra share price has ballooned its dividend yield. After all, if the share price falls and the dividend payment stays the same, its yield increases.
For example, a year ago today, Telstra shares were priced at $5.83 and paying 31 cents in dividends, which is equivalent to a dividend yield of (0.31/5.83) of 5.3%.
Fast-forward to today and the same dividend is forecast to be paid yet the share price has dropped to $4.09. Clearly, if you only had two choices, you would rather buy shares today.
Importantly, as that example shows, buying shares for dividends is only a good idea if you can buy shares that: a) don't fall in value; and, b) continue to pay the dividend!
Over the next two years, analysts are forecasting only a small reduction in the amount of Telstra's yearly dividends ($0.31 this coming year, $0.30 the next), according to Morningstar data.
But what happens to the share price over the next two years is anyone's guess.
And even if the analysts are right and Telstra maintains its dividends above 30 cents per share, it's hard to tell if it can maintain that payment over the next five years.
Indeed, looking at the industry to peers like TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC); Telstra's dividend yield is much higher than any other company.
That could imply that Telstra's future is more uncertain.
In my opinion, the telco heavyweight will find it very, very difficult to grow its per share profits over the coming handful of years. Most likely (in my opinion), Telstra's profits will fall as the NBN continues to grow and TPG and others compete fiercely in the mobiles market.
That's not a terrible thing, of course — but you need to pay a price which accommodates for the lower profits.
Foolish Takeaway
Telstra's dividend is starting to look very appealing. Below $4 per share, I think the risk-reward trade-off might begin to turn in investors' favour. However, I'm not rushing out to buy Telstra shares just yet.
