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Is Telstra Corporation Ltd a SELL?

Since interest rates started falling in November 2011, shares in Telstra Corporation Ltd (ASX: TLS) have risen 67%, not including dividends, versus a gain of 30% from the S&P/ASX 200 Index (ASX: XJO) (INDEX: ^AXJO). When dividends are included, an initial investment has grown over 90% – An impressive gain by anyone’s standards.

As a result, if I had a substantial amount of money in the telco right now I would be busy contemplating my options. Whilst I currently don’t own Telstra shares (I made the decision to sell out last year at a big discount to today’s price), there are certainly reasons why current shareholders should consider selling out some of their holding and taking gains on the table.

I sold out because I was content with the gains I had made and waded into other stocks. However I did miss the strong rally and juicy dividends it has paid since then.

However with interest rates stuck at 2.5% (making term deposits and bonds unattractive investments), and many ASX stocks like Telstra offering generous fully franked dividends, it seems a logical strategy to stay fully invested. Whilst it is dangerous to focus on dividend payments and interest rates alone, Telstra has more to offer than you may think.

For example, the Network Application Services (NAS) division is growing revenues rapidly and Telstra is making inroads into huge Asian markets such as China and Indonesia. It will also continue to remain the dominant player in Australian pay-tv, fixed broadband and, of course, the mobiles market which offer fantastic EBITDA margins and provide solid cash flows. Couple that with ongoing payments from the NBN Co and divestments of non-core businesses and you’ve got a company which is likely to grow earnings and dividends in the long-term.

Buy, Sell or Hold?

Telstra stands out as a better buy than Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Wesfarmers Ltd (ASX: WES) at current prices, and I wouldn’t be surprised if its share price trends higher over the medium-term horizon. As such I think it deserves a spot in risk averse investors’ portfolios, even at current prices. However, whilst I don’t think it deserves a ‘sell’ rating, taking some capital gains off the table mightn’t be a bad idea.

Although, if you do decide to part sell, make sure you prepare for the low interest rate environment by either recognising you’ll only receive sub-par returns from term deposits and savings accounts, or identify other high yielding dividend stocks with more growth potential than Telstra.

For example, recently our top analyst identified one ASX stock with a 7% grossed-up dividend yield and MASSIVE growth potential. He dubbed it, "The Motley Fool's Top Dividend Stock for 2014 - 2015". You can get the name and code of this promising dividend stock free in our new investment report. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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