The Telstra Corporation Ltd (ASX: TLS) share price has fallen 22% since the start of the year.
This means that the telco giant's shares now offer a trailing fully franked 7.7% dividend.
Should you buy Telstra shares for this massive dividend yield?
With Telstra's shares changing hands at 13.5x estimated forward earnings and offering a trailing fully franked 7.7% dividend, they certainly do look attractive. Especially for income investors in this low interest rate environment.
However, I'm not convinced that Telstra's 22 cents per share dividend is sustainable, so I wouldn't be rushing in to buy shares today if it's the juicy dividend yield that is attracting you to the company.
The majority of broker notes that I have seen have Telstra cutting its dividend meaningfully in FY 2019.
According to a note out of Citi, it believes the telco giant will have to cut its dividend down to 16 cents in FY 2019 and then 12 cents in FY 2020.
The broker doesn't believe that Telstra will be able to generate sufficient cash flows to maintain its 22 cents per share dividend.
A note out of Morgans is a little more positive and has Telstra paying a 17 cents per share dividend in both FY 2019 and FY 2020.
And finally, analysts at UBS have forecast a dividend of 16 cents per share this year and next.
Based on the median estimate of 16 cents per share, Telstra's shares are offering a forward fully franked 5.6% dividend today. While this is still a generous yield, I am concerned that its shares could rerate lower if its dividend is cut to this level.
In light of this, I would suggest investors keep their powder dry until it declares its interim dividend at its half year results in February.
What about its rivals?
While TPG Telecom Ltd (ASX: TPM) shares look more attractive after their recent decline, I intend to stay clear of them until ACCC makes its decision on the planned merger between it and Vodafone Australia in March.
But one telco company that I think could be worth a look is Superloop Ltd (ASX: SLC) after a recent pullback in its share price.
