Why I think Telstra shares could be a top buy for passive income in 2023 and beyond

Telstra Group Ltd (ASX: TLS) shares are known for paying passive income to investors in the form of dividends.

The company is part of a group of ASX blue chips that pay fully franked dividend yields like BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA).

But, I think that Telstra could be a stronger business, competitively speaking.

ASX mining shares don’t have much control over the price of the commodities that they’re selling. The ASX bank shares are in a competitive sector where there are numerous lenders all offering a loan – which could reduce margins over time.

For a few key reasons, I think that Telstra could be a very effective pick for passive dividend income in the coming years.

Dividend yield and growth

In a world of inflation, I think it’s important for ASX dividend share investment ideas to display dividend growth so that the dividends aren’t falling behind inflation over time.

In the FY23 half-year result, Telstra grew its interim dividend by 6.3% to 8.5 cents per share. This came after a 25.7% rise in net profit after tax (NPAT) to $0.9 billion.

Commsec numbers suggest that Telstra’s FY23 full-year dividend could be 17 cents per share, which would translate into a grossed-up dividend yield of 5.7%. That’s comfortably more than what we can get from 12-month term deposits at the moment.

Projections on Commsec suggest that Telstra could grow its dividend by 5.9% to 18 cents per share in FY24 and then another 5.5% in FY25 to 19 cents per share. Therefore, by FY25 it could be paying a 6.3% dividend yield.

Defensive earnings

I think that Telstra has very defensive earnings. A lot of households and businesses may rely on their internet connection for carrying out their economic activity. Plenty of people use the internet for education or entertainment as well.

In my opinion, the business has defensive earnings considering how integral yet relatively cheap their telecommunications is.

Telstra boasts that it has the market-leading network, which it is improving with its 5G network investments. The company feels confident enough to pass on inflationary increases to mobile subscribers, which is good for earnings and maintaining passive income payments.

I’d rather own a business that offers an essential service to a sticky customer base than an ASX bank share which is now operating in a very competitive environment.

Is the Telstra share price a buy?

I believe the ASX blue chip share would make a very effective investment for passive dividend income at the current level.

Using Commsec projections, it’s valued at 21 times FY25’s estimated earnings. That’s not exactly cheap, but I think the fact that its growing profit as well as its defensive nature makes it worthy of that sort of valuation.

With Telstra growing and diversifying its earnings, I think the business has a very promising future. Receiving and transmitting data is only going to become more important as the years go by, in my opinion, so I’d back Telstra to keep benefiting over time.

The post Why I think Telstra shares could be a top buy for passive income in 2023 and beyond appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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