The dividend yield from Telstra shares has fallen 7% this year. Here's why

How can it be that Telstra's dividends are rising but its yield is falling?

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Key points

  • At the start of the year, Telstra shares offered a dividend yield of 4.3%
  • But today, those same shares have a trailing yield of just over 3.9% on the table
  • That's despite Telstra giving its investors a decent dividend pay rise back in March

Yes, you read correctly, the dividend yield from Telstra Group Ltd (ASX: TLS) shares has fallen 10% over 2023 so far. How could that be, you might ask.

After all, Telstra shares paid out a total of 16.5 cents per share in dividends over 2022, a nice increase over 2021's total of 16 cents. And 2023's interim dividend of 8.5 cents per share was a decent rise over 2022's interim dividend of 8 cents per share. This means that over the past 12 months, Telstra has been paying out its highest dividends since 2018.

So why has its dividend yield fallen?

It's a good question. A company's dividend yield is a function of two underlying metrics. The first is the company's raw dividends per share. In this case, Telstra is doing everything right, as we've just discussed. But the second is a company's share price itself. If a company's shares rise in value, it dilutes the power of its underlying dividends.

Why has Telstra shares' yield dropped in 2023 after a dividend pay rise?

To illustrate, let's take a look at where Telstra shares were at the start of the year. Back in early January, Telstra shares started 2023 going for $3.95 each, as you can see below:

For an investor buying into Telstra at that price, the preceding 16.5 cents per share in fully-franked dividends that the telco paid out would have given the Telstra share price a trailing dividend yield of 4.18%.

Right now, we can bump up the telco's trailing annual dividend payout to 17 cents per share, thanks to the upped interim dividend from March. If Telstra shares were still going for $3.95 each, the company would have a dividend yield of 4.3% right now.

However, that is not the case. Over 2023 so far, Telstra shares have risen a healthy 10%, and are going for $4.34 as of yesterday's market close. Because the share price has appreciated so meaningfully, this has had the effect of sharply lowering the company's dividend yield. Today, Telstra shares offer a trailing dividend yield of just 3.94% at this share price of $4.34.

So although Telstra has given investors what would have been a much-appreciated dividend pay rise this year, its dividend yield has actually fallen by 6.51%.

This just proves the benefits of buying quality dividend shares like Telstra at the best value you can get. Not only would an investor who dithered miss out on that healthy capital growth, but the yield on cost would have fallen substantially as well.

Motley Fool contributor Sebastian Bowen has positions in Telstra Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended 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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