2 shares to buy and 2 to avoid for SMSF investors

As highlighted in this article last month, it was unsurprising to see which stocks ranked most highly in the portfolios of self-managed super fund (SMSF) investors.

The usual suspects like Telstra Corporation Ltd (ASX: TLS) Woolworths Limited (ASX: WOW) and BHP Billiton Limited (ASX: BHP) featured prominently as most SMSF investors tend to gravitate towards companies they are familiar with.

In the past, this strategy has been quite successful and many of those big name blue-chip shares have delivered great returns for shareholders. For example, investors who have owned Commonwealth Bank of Australia (ASX: CBA) shares over the last 10 years have seen a total shareholder return of around 12.3% each year on average.

Unfortunately, I don’t think investors can expect to generate those same sort of returns over the next period as virtually all of the top 10 holdings, with the exception of CSL Limited (ASX: CSL), face either an industry headwind or slowing earnings growth.

That doesn’t mean investors won’t be able achieve a reasonable return, especially if interest rates continue to fall, but I do believe there may be better investment opportunities beyond the top 10 stocks of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

With that in mind, here are two shares that I believe SMSF investors should consider for additional growth:

Magellan Financial Group Ltd (ASX: MFG) – Magellan shares have become less attractive over the past month following a nice rally but I still think there could be a great opportunity for investors if the shares fall back towards the $20 level. The international fund manager has a stellar record and is seeing strong fund inflows especially for its infrastructure fund. The shares are more volatile than your average top 20 company but offer the potential for far higher returns.

G8 Education Ltd (ASX: GEM) – G8 shares look as though they have recovered from the negative sentiment that was associated with its consolidator business model and are now trending in the right direction. The childcare industry has some attractive tailwinds behind it despite the fact it is an industry with fairly low barriers to entry. The attractive part about G8 for SMSF investors is its dividend – currently 5.9% fully franked and expected to grow steadily over the next few years.

Two shares that I think SMSF investors are best to avoid include:

Qantas Airways Limited (ASX: QAN) – The airline business is one of the most capital intensive industries with a huge number of variables outside of management’s control. While Qantas is probably one of the best airlines in the world, it has a terrible record of delivering returns on shareholders’ capital and has frequently delivered a return on equity of less than 5%. This is not an attractive risk-reward equation in my opinion, and is a share that is best left to traders and short-term momentum investors.

Santos Ltd (ASX: STO) – Although there is the potential for Santos to rebound significantly if the oil price continues to climb, I don’t think it should be a core holding for any SMSF portfolio. It raised fresh capital last year but Santos’ balance sheet is still susceptible to a fall in the oil price and it is unlikely investors will see any significant dividends paid out in the coming years.

Unlike Santos and Qantas, these five dividend paying shares are perfect for SMSF investors.

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Motley Fool contributor Christopher Georges owns shares of G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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