On the receiving end

However, as a consultant to researcher Morningstar, Tony Young, points out, it is wrong to base an investment decision solely on dividends, no matter how high the yield may be.

Telstra is shaping up as the classic case in point. Last year, some analysts were recommending Telstra shares on the basis of its great dividend yield. Shares in the telco were trading about $3.15 and paying 28? of fully franked dividends annually, to give a cash yield of almost 9 per cent.

But with Telstra's earnings downgrades during the past year, the share price is significantly lower.

"Investors should only buy Telstra shares if they believe the current dividend is sustainable and it can lift current earnings per shares by a reasonable percentage," Young says.

But can the telco reinvent itself? It's a question many of Telstra's 1.4 million shareholders are asking. The company's after-tax profit for the year to June 30 fell from $4 billion to $3.88 billion. The telco confirmed at its AGM last week that it is expecting a "high single-digit" fall in profit for the present financial year as it competes more on price and focuses on winning and retaining customers. It's fixed-line customers are continuing to hang up as more households move to mobile phones only, though Telstra has the best mobile coverage.

Telstra's share price is now about $2.60 - record lows. Those who bought shares in Telstra in the initial float in 1997 paid a total of $3.30 for the shares. Investors in the second float in 1999 paid $7.40 a share and those who bought shares in 2006, in the third and final float, paid $3.60.

Sharemarket analysts, such as the editor of Sound Money. Sound Investments, Greg Canavan, and the research director at share investment newsletter The Intelligent Investor, Greg Hoffman, believe Telstra is "sell". Still, other analysts believe there's a case to hang in there.

The head of equities research at Morningstar, Peter Warnes, is relatively positive on the business. He says the stock is hard to analyse given the uncertainty of the future of Telstra's $11 billion National Broadband Network deal. However, he says, for most older shareholders who value the income, continuing to hold the stock is the best move. The decision will also depend on how much was paid for the shares. Those who bought in T1 and T3 will be enjoying a "grossed up" yield of at least 10 per cent, or almost double what they'd earn on cash in the bank. Those who bought in T2 at $7.40 will be on a grossed-up yield of a little more than 5 per cent.

Warnes says even if the dividend were to be cut, the yield would still be good. Younger investors, for whom capital growth is more important than income, may want to consider their options, he says. Telstra has recently warned shareholders to be wary of unsolicited letters from companies making low-priced offers for their shares.

The author owns Telstra shares.