For dividend income, you could buy Telstra Corporation Ltd (ASX: TLS) shares right now.
…and at $6.21 per share, it's expected to yield a hefty grossed-up dividend of 6.9% over the next year.
That compares to the roughly 2.5% return from big bank term deposits.
It seems to be a no brainer: Why would you keep your money in term deposits when you could buy Telstra shares?
However could and should are two different questions altogether.
Sure, you could buy Telstra shares, but should you?
In short I think the answer is no.
However if you're prepared to invest for 10 years, currently have a well-diversified portfolio and can stomach seeing the shares you own drop by up to 50%, then you might overlook its current valuation and buy the stock. After all, it's a very reliable dividend-paying stock.
But if you want to put the odds of market-beating returns in your favour or are investing for a shorter period of time, be patient.
Telstra shares have rallied more than 100% in recent years and whilst the dividend yield is attractive in the current low-interest rate environment it's important to remember Telstra isn't growing as fast its smaller peers such as M2 Group Ltd (ASX: MTU) or TPG Telecom Ltd (ASX: TPM). Therefore investors seeking market-beating returns from Telstra need to have a key focus on valuation.
Across a number of standard valuation metrics, Telstra shares do not appear to be the bargain they were three, four or five years ago. Based on my estimates, Telstra trades on an enterprise value to free cash flow ratio of 13 times and forecast price-earnings ratio of 18. Both are high-ish for a company expected to grow profits at mid-single digits over the medium term.
Buy, Hold, or Sell?
Telstra is a great business. And as Warren Buffett famously quipped, "It's far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
However why should we rush? Why not wait for it to come back in price or until the value proposition tilts back in the favour of net buyers. Indeed, there's plenty of better ways to invest your cash on the ASX at the moment…
