One of the most important metrics I look at when analysing an ASX dividend stock is its cash flows. Ultimately, free cash flow, or the money left over after a company has deducted its expenses from its revenues, drives the intrinsic valuation of a company. It is from its cash flow that a company can fund reinvestment in its business, initiate share buybacks, or pay dividends.
If a business can’t deliver a consistent return on its invested cash, well, it doesn’t make for a great investment itself.
Telstra Group Ltd (ASX: TLS), fortunately, does not have this problem. Free cash flow, for any business, can fluctuate from year to year. Given that this metric is more difficult to play with from an accounting perspective, one-off expenses and unforeseen hits to the budget can’t be amortised or depreciated over many years.
As a telco, Telstra does have a large capital expenditure budget. Network towers, data centres, and cabling ducts need regular and ongoing maintenance. Saying that, this ASX dividend stock’s position as the country’s largest provider of both mobile and fixed-line internet and telephony services more than makes up for this relatively large cost base. Telstra is a company with a formidable economic moat. Customers know that its mobile network is superior to that of its rivals, with Telstra often the only choice for Australians who live in rural or regional areas.
This gives this ASX dividend stock enormous pricing power, a consistently wide profit margin, and thus, cash flows.
How this ASX dividend stock turns cash flow into income
We can see this in the massive amounts of free cash flow that this ASX dividend stock generates. For its full 2025 financial year, Telstra reported operating net cash flow of $7.32 billion, up 3.9% from FY 2024’s $7.05 billion.
It is this free cash flow that enabled Telstra to increase its annual dividend by 5.55% from 2024 to 2025, which rose from 18 cents per share to 19 cents.
In 2026 thus far, the pattern has continued. In its earnings report last month, Telstra announced that its 2026 interim dividend would rise by 10.5% to 10.5 cents per share. If this pattern continues for the rest of 2026, this year will be the fourth in a row that shareholders will see an annual dividend hike.
Today (at the time of writing anyway), Telstra is trading fairly close to its 52-week high ($5.26) at $5.15 a share. Even so, this ASX dividend stock is trading with a hefty dividend yield of 3.88%.
The post An ASX dividend stock yielding 3.9% with consistent cash flow appeared first on The Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen 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.