Who could blame your financial advisor for telling you to buy Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW) in the current low interest rate environment?
After all, term deposits are offering returns of between just 2.5% and 4% per year.
And your advisor will likely get paid (handsomely) for making the shrewd observation that the above three companies are paying fully franked dividends, easily in excess of term deposit rates.
Thus, it appears a flawless idea to transition your investments into some of Australia's biggest and most successful companies, right?
None of those three stocks are cheap at today's prices and do not present as compelling buying opportunities. Sure, if you hold them already, keep holding.
But think of it like a private business (remember stocks are just part ownership of a larger enterprise).
Telstra shares, for example, trade on a net asset value over five times and 15 times last year's profits. Sure, it's got a dividend yield of 5.2%, but if investors soon realise just how expensive it is, it could fall more than 5.2% very quickly.
However companies can deserve to trade on those types of high valuations. But when the company has a mammoth market capitalisation of $70 billion and is forecast to growth profits by low-single digits, it's hardly worthy of such a price.
Instead, long-term investors should be looking at companies such as M2 Group Ltd (ASX: MTU), the owner of Dodo, Primus, Eftel and Commander telecommunication brands. Indeed, the group might be trading on a P/E ratio of 16 and a dividend yield of just 3.3%, but the growth prospects of it are much better than its larger peer.
Another better long-term dividend stock idea is Collins Foods Ltd (ASX: CKF). The $204 million company owns and operates KFC stores under a franchise agreement with America's YUM! Brands.
It also owns and operates the Sizzler's fast casual dining chain (which is currently being rebranded as Get Refreshed). In Australia, it owns 26 sizzler stores and another 61 in Asia (including Thailand, China and Japan). It also has a 50% stake in another growing food outlet Snag Stand.
It trades on a P/E ratio of 12, dividend yield of 4.8% and net asset value of 1.06.
Buy, Hold, or Sell?
Telstra is great company with a bright future ahead. However I've found it rarely works out favourably to buy shares in companies when they're trading at 10-year highs and aren't expecting much growth in the near-term. I could be wrong (it wouldn't be the first time) but I'm a firm believer that not losing money is more important than making it. Indeed I believe Telstra's share price affords investors very little, if any, margin of safety.
