Thanks to interest rates being stuck at just 2.5% and inflation sitting at 3%, it doesn't take a financial advisor, economist or analyst to know that considering big dividend stocks as an alternative to term deposits, makes sense. Especially when they're offering fully franked returns in excess of 5%.
Telstra Corporation Ltd (ASX: TLS) and the big banks, offer above-average dividend yields and a better level of safety not ascribed to other, more volatile, stocks on the market.
However, despite offering a grossed-up dividend yield of 7.5% fully franked, it appears Telstra is fully, or perhaps overvalued.
Over the past three years as interest rates have dropped, shares in Telstra have climbed a whopping 86% not including dividends, versus a return of just 31% from the S&P/ASX 200 (INDEXASX: XJO). Furthermore, since 2011 Telstra's earnings per share have risen close to 31% and dividends are up just 5%. Shares now trade over 16 times trailing earnings per share.
Buy, Hold or Sell?
Telstra's International and Network Application Services (NAS) divisions continue to grow strongly and will do so long into the future. However, I believe the market is currently expecting too much from Telstra shares and some investors are assuming we won't get a better buying opportunity in the future. As such I think Telstra is a hold at best. Whilst I could be wrong – and today could prove to be a great buying opportunity – I know one thing is for sure: patience doesn't lose us money.
