Should I buy Telstra shares for passive income?

Telstra Group Ltd (ASX: TLS) has long been a popular choice with Australian income investors.

The telecommunications giant provides essential services to millions of households and businesses, while regularly returning cash to shareholders.

At around $4.86 today, would I buy Telstra shares for passive income?

Why Telstra suits an income portfolio

I think Telstra has several characteristics that work well for investors looking for regular income.

Mobile and internet services have become a normal part of household and business spending. Customers still need connectivity when economic conditions weaken, which gives Telstra a relatively dependable source of revenue.

The company also holds a strong position in Australian mobile.

Its network reaches across the country, and continued investment should help Telstra maintain the quality and coverage that customers expect.

For an income investor, I like having the dividend supported by a business selling services people use every day.

Telstra is not immune to competition or rising costs, but I think its position provides a solid foundation for shareholder returns.

What income could investors receive?

Telstra has also made growing shareholder returns part of its longer-term plans.

Consensus estimates point to fully-franked dividends of 22 cents per share in FY27 and 22.5 cents per share in FY28.

At a Telstra share price of $4.86, those forecasts translate into prospective dividend yields of approximately 4.5% and 4.6%, respectively.

That is a healthy level of income in my view, particularly with franking credits potentially increasing the value of those dividends for eligible Australian investors.

While the forecast increase from 22 cents to 22.5 cents is fairly modest, I am comfortable with that.

For passive income, I would rather see the dividend gradually increase alongside the business than depend on an unusually high yield that may prove difficult to sustain.

There could still be some growth

I would not view Telstra shares purely as a dividend investment.

The company’s Connected Future 30 strategy is targeting growth in cash earnings through to FY30, which could give management more capacity to invest in the network and increase shareholder returns over time.

Mobile remains important, but Telstra also has opportunities across enterprise connectivity, infrastructure, and other telecommunications services.

I am not expecting spectacular growth from a company of Telstra’s size.

But a combination of modest earnings growth and regular dividends could still produce worthwhile total returns over a long holding period.

What would I watch?

Competition is one area I would keep an eye on.

Telstra needs to continue investing heavily in its network while ensuring customers see enough value to remain with the company.

Capital expenditure is also substantial in telecommunications, so strong revenue does not automatically translate into money available for dividends.

Still, I think Telstra’s scale and recurring customer demand put it in a good position to manage those requirements.

Foolish takeaway

Yes, I would buy Telstra shares for passive income.

At $4.86, forecast dividends of 22 cents and 22.5 cents per share offer prospective yields of around 4.5% to 4.6%, with full franking expected.

I also like that the income comes from an essential-services business with the potential to keep growing earnings gradually over time.

For investors looking for a combination of regular income and relative stability, I think Telstra remains one of the ASX shares worth considering.

The post Should I buy Telstra shares for passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino 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.