Why I keep buying shares of this 5%-yielding ASX dividend stock

There’s an ASX dividend stock on the market right now that, until very recently, was yielding close to 5%. This particular ASX 200 blue chip has rallied significantly over the past few weeks, which has now pushed down its dividend yield closer to 4.5%. But at the price I paid for this stock, I am indeed enjoying a dividend yield of well over 5%.

That ASX dividend stock is none other than Telstra Group Ltd (ASX: TLS). Although Telstra shares are not a huge part of my overall ASX share portfolio, they do occupy a small corner of it. And I am happy to keep it there.

Telstra went through a major correction in 2023. The ASX dividend stock was asking north of $4.30 this time last year. But in August, Telstra revealed that it would be keeping some of its valuable infrastructure assets in-house, bucking the expectations of a sell-off by the markets.

Investors were not impressed at the time and punished Telstra by slowly dropping its share price. By May of this year, the telco had hit a new 52-week low of just $3.39 a share, a fall of more than 20% from last year’s highs.

Buying an ASX dividend stock when it’s down

But far from despairing, I picked up some extra shares. I thought the market’s reaction to Telstra’s infrastructure announcement was vastly overcooked. After all, is it really a bad thing if a company decides to retain some of its most valuable assets?

At the current Telstra share price, this ASX dividend share is sporting a yield of 4.58%. That comes from the company’s last two dividend payments.

Telstra stock paid a final ASX dividend of 8.5 cents per share last September, followed by an interim dividend of 9 cents per share in March. As is typical with Telstra’s payouts, both dividends came with full franking credits attached.

Telstra might be offering a yield of 4.58% today. But back in May, investors could have got in when this ASX dividend share was sporting a yield of 5.16%. If one includes the value of those full franking credits, that yield grosses up to an even more impressive 7.37%.

This shows that ASX investors have much to gain by buying a quality dividend share when the market is shunning it.

I think the recent Telstra share price rally has vindicated this contrarian outlook. This telco’s shares have been rallying for around a month now, but buying accelerated ever since Telstra revealed it would be increasing its mobile pricing across the board earlier this week.

Telstra announced that its mobile plans would be rising by around 4% from August, with most plans increasing by between $2 and $4 per month. These rises will also take effect for Telstra’s value-conscious Belong brand.

Here’s how Telstra justified its decision to customers:

It takes a lot of work and cost to run a mobile network as large as ours, and even more to support the increased usage we have seen on our network.

The investments we make in our mobile network don’t just help to keep your phone connected to your favourite content and apps. We know those are important, but our network does so much more every single day…

These price changes help us to keep investing in mobile coverage, performance and local support, as well as ongoing investments to improve the security of our services.  We monitor our network 24/7 to help protect against scams by blocking malicious calls and texts from reaching you.

Moats and dividends

I think this decision demonstrates the presence of a wide economic moat for Telstra. A ‘moat’ is a term first employed by legendary investor Warren Buffett. It refers to an intrinsic competitive advantage a company can possess that helps protect its profits from competitors – in much the same way as a moat protected a castle back in days of yore.

A moat can be anything from a pricing advantage to a powerful brand. However, in Telstra’s case, I believe its superior network forms the backbone of its moat. Many customers, particularly Australians who live in rural or regional areas, simply have to use Telstra’s network because no other provider services them.

So, while Telstra’s pricing increases won’t be welcomed by customers, they will probably be accepted. That is a moat in action. It seems the market agrees with this sentiment too, given that this ASX dividend stock has rallied more than 3% this week in light of this announcement.

When it comes down to it, I am happy to own Telstra stock in my ASX portfolio. This company may not deliver life-changing wealth, but it does deliver hefty, reliable dividend income and franking credits like clockwork, and that’s worth a lot to me.

The post Why I keep buying shares of this 5%-yielding ASX dividend stock appeared first on The Motley Fool Australia.

More reading

• Telstra stock pays a massive 7% dividend, and now could be a great time to buy
• Here are the top 10 ASX 200 shares today
• Why Catalyst Metals, Imugene, Red 5, and Telstra shares are pushing higher today
• Top brokers name 3 ASX shares to buy today
• Is the Telstra share price good value in July?

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.