As the market has recently shown, Telstra remains the most popular stock for safety and income but its recent rise and fall calls that sentiment into question. As investors flocked from term deposits to Telstra, the market realised the paradox that inevitably bites down on income investors.
If you bought Telstra shares a month ago, you would be sitting on a 10% loss and still be without a dividend, something that happens all too often when you move with the market. The cause and effect of macro events is very important for stock pickers who invest in ‘safe’ blue chip stocks.
The price of Australia’s biggest companies like Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC) and Telstra went way above sustainable levels. Not only did the inflated prices push down the dividend but it also made it more risky, something many investors may have forgotten. Even at current prices, Telstra operates at a P/E of 15 and has said potential for domestic growth is slowing.
Telstra’s dividend may seem unrivalled but you only have to look outside the biggest companies and into the S&P/ASX 200 (ASX: XJO) (^AXJO) to find some even higher yielding stocks. One unloved beauty is Metcash (ASX: MTS), owner of IGA branded supermarkets. It is currently trading at a modest price of $3.68 but pays a dividend of around 7.5% fully franked.
In the long term, many of the stocks we know today will be way above their current prices but it’s important to know when a stock is overpriced and when we should exhibit patience. After all, patience doesn’t lose you money.
With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. Chances are even if you don’t own Telstra shares directly, your superannuation fund does. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here to find out whether to buy, sell, or hold Telstra in this brand-new FREE report.
Motley Fool contributor Owen Raszkiewicz owns shares in Metcash.