Is Telstra Corporation Limited (ASX:TLS) A Smart Pick For Income Investors?

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Over the past 10 years, Telstra Corporation Limited (ASX:TLS) has returned an average of 7.00% per year to shareholders in terms of dividend yield. Let’s dig deeper into whether Telstra should have a place in your portfolio. Check out our latest analysis for Telstra

How I analyze a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

• Is their annual yield among the top 25% of dividend payers?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

• Has dividend per share risen in the past couple of years?

• Can it afford to pay the current rate of dividends from its earnings?

• Will it be able to continue to payout at the current rate in the future?

ASX:TLS Historical Dividend Yield Jun 7th 18

How well does Telstra fit our criteria?

Telstra has a trailing twelve-month payout ratio of 71.80%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect TLS’s payout to increase to 88.26% of its earnings, which leads to a dividend yield of 7.78%. However, EPS is forecasted to fall to A$0.3 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income. If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Not only have dividend payouts from Telstra fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends. Compared to its peers, Telstra has a yield of 2.71%, which is on the low-side for Telecom stocks.

Next Steps:

Whilst there are few things you may like about Telstra from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three relevant factors you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for TLS’s future growth? Take a look at our free research report of analyst consensus for TLS’s outlook.

2. Valuation: What is TLS worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TLS is currently mispriced by the market.

3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.