Telstra Corporation Ltd (ASX: TLS) has enjoyed an excellent run over the past five years.
With its share price up 117% and another 50% in fully franked dividends, it's fair to say investors have been well-rewarded for risking their hard-earned cash on the market.
However, at around $6.30 per share, does Telstra still offer the same risk-reward trade-off it did back in 2010? Unfortunately, I don't think so.
I'm on record as saying, I'd want to pick up Telstra shares below $5.00.
However with interest rates of just 2.25% (and possibly going lower) and its dividend yield still an impressive 4.7% fully franked, I doubt I'll get the opportunity to buy some anytime soon.
Grossed-up for franking credits, its yield of 6.7% crushes the 2.7% interest rates on term deposits at a big four bank.
It's important to remind ourselves however that successful share market investing is more about managing risk than making money. Once you've determined a good price to pay, you've got to stick to it.
As billionaire investor, Warren Buffett, famously said, there are two rules to investing:
- Never lose money
- Never forget rule number one
It might sound simple – and it is – but it's certainly not easy.
As the following graph shows, if you lose 50% of your investment in the first year, it'll take 17 years at double the growth rate to catch up to the conservative investor who plodded along at 5% per year.
Is Telstra a Buy, Hold or Sell?
In my opinion, at today's price of around $6.30, Telstra's risk-reward trade-off isn't in favour of investors looking to beat the market. Whilst it may have all the characteristics of a great income stock, in a low-interest rate environment, investors are advised to keep it on their watchlist and wait for a better entry point.
