On Tuesday the Telstra Corporation Ltd (ASX: TLS) share price dropped 0.3% to finish the day at $2.92.
At this price the telco giant's shares provide investors with a trailing fully franked 7.5% dividend yield.
Is the Telstra dividend yield too good to be true?
As much as I would love to see the company maintain its 22 cents per share dividend in FY 2019, I think it is very unlikely to be the case.
Due to the tough trading conditions that Telstra, TPG Telecom Ltd (ASX: TPM), and Vocus Group Ltd (ASX: VOC) are facing in the telco market due to heightened competition and low NBN margins, I don't believe it will be able to generate sufficient free cash flow to maintain its current dividend.
Instead of 22 cents per share, I think a dividend in the region of 15 cents to 16 cents per share is more likely to be paid to shareholders in FY 2019.
Based on its last close price, this equates to a forward yield of approximately 5.1% to 5.5%.
Should you still buy shares?
While a dividend of 15 cents to 16 cents per share will still provide a yield far greater than the market average, I believe there's a danger that a dividend cut could lead to its shares de-rating by ~10% to a level that means they provide a 6% yield.
In light of this, I would suggest investors stay clear of the company's shares until the release of its half year results in a little over three weeks. At that point I expect the Telstra board to make its full year dividend plans clear.
In the meantime, I think investors would be better off looking at alternative dividend options such as computer software and hardware distributor Dicker Data Ltd (ASX: DDR) or even mining giant BHP Group Ltd (ASX: BHP).
