Why I’m Still Buying The Best Yield Stocks

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Peter Switzer, Switzer Super Report

Allow me the luxury of quoting a bit of Rudyard Kipling as I advance a thought that should be characteristic of an experienced investor who really does not want to be a punter.

Actually – maybe I will delay the Kipling stuff for a big ending.

Of course I know some clients who have 90% of their super portfolio driven by the investment strategy below but they use the other 10% to try and shoot the lights out. They’re just those kind of guys and while I suspect some women are like them, I’m yet to meet one.

The smart way

But here I want to concentrate on playing this market the smart way and despite the warnings from pundits and journalists, the simple facts are the banks and Telstra ((TLS)) still remain a good play to a cautious investor.

Let me prove my point.

Take Commonwealth Bank ((CBA)) – if dividend is maintained you get $4.18 on $81.32 or a 5.1% return before franking, so let’s call it 6-6.5%.

National Bank ((NAB)), which many might remember I stuck by when the doubters gave it the flick, is now $35.20 and if we work off $2 as a dividend, then that’s a yield of 5.6%! Throw in the franking and NAB even looks more appealing to an investor chasing income or yield.

Also banks can benefit from a stronger economy, which I expect over the next 12 months, and rising interest rates can help the bottom line as borrowers generally get hit faster than savers benefit from rising rates.

One risk could be the Murray Inquiry into the financial system but I don’t think the Abbott Government will do anything to really hit the profits of the banks, as they are so important for investors and super funds.

The case for Telstra

The same story, give or take a percentage applies to the other banks and so what about Telstra?

Its 30 cent dividend on $5.56 gives a yield of 5.4% but franking credits again push the telco towards 7%, depending on your tax position.

There remain three reasons to buy Telstra.

First, according to Statista and The Wall Street Journal, this is where smartphone growth is expected to come from over 2013-19:

• North America 110 million subscriptions

• Western Europe 150 million

• Latin America 393 million

• Central Europe/ Middle East/Africa 986 million

• Asia-Pacific 2,077 million!

So Telstra is in the right geographical region.

Second, video online will massively pump up data traffic. Have a look at the projected growth in petabyte:

• 2013 — 29,071

• 2014 — 35,884

• 2015 — 44,204

• 2016 — 54,635

• 2017 — 67,672

• 2018 — 83,298!

The growth in demand for video and therefore data has to be a plus for Telstra considering its dominant position.

Third, have a look at how US millennials spend their media time nowadays:

• Browse the Net — 3.34 hours

• Social networking — 3.12 hours

• Live TV — 2.19 hours

• Video Games — 1.47 hours

• Time-shifted TV — 1.47 hours

• Movies  — 1.15 hours

• Radio — 1.15 hours

• Email/texts/apps — 1.04 hours

• Talk about news, products, brands — 1.04 hours

• Read print — 00.32 hours!

Now I ask you, looking at this, aren’t telco-companies well placed?

Telstra has a P/E of 16 and if earnings keep rising, as the info above suggests should happen, then there is plenty of upside in this company.

The outlook

So let’s try to imagine where the overall market might be in a year’s time. The market ended last week at 5625 so if we saw a conservative 10% rise in stocks, and lets imagine the banks and Telstra only gain 5%, then putting these five together could easily return you 11% plus.

The goal has to be to create a portfolio where the capital might fluctuate, even aggressively, but your dividend flow – helped by a cash buffer which you get into in GFC-style times and you add to in big boom times – is far more stable.

And if you can do this across 20 quality companies, then you will be a wise investor my son. (That’s the Kipling bit, in case you missed it.)

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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