2 shares to buy and 1 to avoid for your SMSF

Credit: NAB

In most instances, investors who seek companies to add to their self-managed superannuation fund (SMSF) will focus their attention on very high quality, defensive, dividend-paying stocks.

I certainly think that this “all-weather” investment approach is the right strategy for most SMSF investors, however, I’d preface this view by noting that the price you pay is also important.

For example, in my opinion, InvoCare Limited (ASX: IVC) is a wonderful investment candidate for an SMSF.

As Australia’s leading operator of funeral services and crematoria, InvoCare’s business is most definitely defensive.

An aging and growing population means InvoCare is set to benefit from a steady tailwind. The sustainability of its business operations also mean that shareholders can have a high level of surety regarding future dividends.

The one sticking point with InvoCare is the price.

Unfortunately for potential investors, the market is well aware of the attractiveness of InvoCare and this has led to the stock commanding a premium market valuation.

Don’t lose sight of price

Investing is all about trade-offs.

In InvoCare’s case the trade-off for being a top quality business is that the shares look expensive (in my opinion). They’re priced on around 27 times the average earnings forecast over the next two years.

This means an investor runs the risk of overpaying and ultimately earning a poor return on their investment despite the underlying business operations performing well.

2 shares to buy

While InvoCare’s shares might be best avoided for now (but keep them on your watch list), the following two stocks could, in my opinion, be potential buys today thanks to their mix of quality and attractive pricing.

National Australia Bank Ltd. (ASX: NAB) obviously faces some near term earnings headwinds in the form of potential declines in official interest rates and a tightening credit cycle.

It’s highly likely that in a decade’s time however, NAB will still be a dominant domestic bank with a valuable franchise.

Given the potential near term downside risk to earnings, a strategy of slowly acquiring a stake in NAB could be sensible. The stock is currently priced on an average price-to-earnings multiple for the next two forecast years of 11.5 times.

AusNet Services (ASX: AST) is a leading distributor of electricity and gas in Victoria via its network of pole, line and pipe transmission assets.

As an essential service operator, shareholders gain access to a very defensive revenue stream which is backed by a regulatory framework that provides confidence in predicting those revenues.

While the PE multiple of nearly 22 times average forward estimates isn’t a screaming bargain, it’s arguably a reasonable price to pay for this company.

Discover the 'new breed' of blue chips that could take your SMSF portfolio higher in 2016

Forget BHP and Woolworths if you want to retire rich! These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.