Is now the time to buy Telstra shares for passive income?

A man points at a paper as he holds an alarm clock.A man points at a paper as he holds an alarm clock.

Telstra Group Ltd (ASX: TLS) shares are in the green, up 0.61% to $4.13 at the time of writing.

The communications sector is leading the market today. The S&P/ASX 200 Index (ASX: XJO) is down 0.94% while the S&P/ASX 200 Communication Index (ASX: XTJ) is up 0.3%.

Telstra shares are the top stock in the communications services sector by market capitalisation.

Why buy Telstra shares for passive income?

Telstra is known as an ASX dividend stock, not an ASX growth stock. Let’s look at why.

If we look back 20 years, Telstra closed at $4.06 on 7 March 2003. That means they’re up by a measly 1.35% over that entire two-decade period. So yeah, growth ain’t why people buy Telstra shares.

Instead, investors buy for dividends, or in other words, passive income.

This is why Telstra shares have been a classic cornerstone holding in retirees’ portfolios for decades.

It’s an obvious yield share to own because the company provides essential services that Australians will always want. That means it has relative stability in terms of income, making it a great inflation hedge.

Here is a 20-year chart showing the 12-month trailing dividend yield of Telstra shares.

Source: TradingView

Remember, the dividend yield is always expressed as a percentage of the share price at the time.

The yield is shown in aqua blue and the Telstra share price is shown above in navy blue.

Telstra pays two dividends per year, so about 40 separate 12-month trailing yield points are shown.

As of 31 December 2022, Telstra was paying an annual dividend yield of 4.29%.

But it’s worth noting that Telstra has paid much higher dividends at many points.

The highest dividend yield during this 20-year period was 9.69% back in 2011.

Telstra also paid 8.4% in 2018.

Those are very appealing levels of passive income for a non-ASX mining share and a non-ASX bank share.

What are the brokers forecasting for Telstra dividends?

As we recently reported, top broker Macquarie has put Telstra shares at the top of its example income portfolio for new investors.

Macquarie’s ‘model portfolio’ only includes ASX stocks that provide higher comparative earnings certainty, strong cash flows, and “tax-effective” dividend income, which means franking credits.

Telstra dividends are 100% franked, which means investors get the full 30% company tax benefit.

So, this is clear evidence that Macquarie likes Telstra shares for passive income above all other ASX shares. In fact, Telstra has an 8.8% weighting, which is a very big chunk of the model portfolio.

Will the Telstra dividend go higher?

Macquarie forecasts that Telstra shares will pay a fully franked full-year dividend of 17 cents per share in FY23. Another top broker, Goldman Sachs, is tipping the same for FY23.

Based on the current Telstra share price, this represents a dividend yield of 4.11%.

Looking ahead, Goldman thinks the Telstra dividend will go 5.9% higher in FY24 to 18 cents per share (cps).

It also tips an 11.1% boost to the Telstra dividend in FY25 to 20 cps.

Morgans is tipping 16.5 cps worth of passive income for Telstra investors in both FY23 and FY24.

Telstra shares went ex-dividend last Wednesday. The company will pay investors 8.5 cps on 31 March. This was up from 8 cps last year and ahead of consensus estimates of 8.2 cps.

Is there any share price growth on the horizon?

As discussed, growth is not why people buy Telstra shares. Having said that, there’s some good news on this front.

Morgans has an add rating on Telstra shares and a 12-month price target of $4.70. That means a potential 13.8% capital gain for investors who buy today.

Macquarie has an outperform rating on Telstra with a 12-month price target of $4.64.

Goldman also has a buy rating on Telstra shares with a price target of $4.60.

The post Is now the time to buy Telstra shares for passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has positions in Macquarie Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Macquarie Group and 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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