The 'Rule of 72' calculates the number of years required to double your money at a set interest rate.
For example. if you are offered a 3.5% return on a term deposit you simply divide 72 by 3.5 to get the required number of years it'd take to make a 100% return on your money. In this example the answer would be 21 years.
Using the rule of 72, it's obvious a 7.2% annual return would be enough to double your money in 10 years (72/7.2 = 10).
At current official interest rates however it'd be difficult — nigh impossible — to find a reputable Australian bank offering a 7.2% annual return on a term deposit or savings account.
As a result, many Australians are turning to the local sharemarket, or ASX, for superior returns.
Reliable dividend-paying stocks such as Telstra Corporation Ltd (ASX: TLS) are at the top of the pecking order.
Grossed-up for its tax-effective franking credits, Telstra is expected to pay a dividend equivalent to 7.12% in the next financial year. That means, Telstra's dividend is just shy of the 7.2% return needed to double your money in 10 years.
A product of its strong competitive advantage in the local telecommunications market, Telstra's dividend is one of the most reliable on the ASX.
Moving up the risk curve
However, as I wrote yesterday, at its current price of around $6 per share, an investment in Telstra is far from a guaranteed success.
Unlike the partial government guarantee on term deposits, Telstra's share price can be volatile.
In fact, it may even fall below your purchase price and never return to that level.
It could also cut its dividend entirely — however unlikely that may be.
To adjust for the higher level of risk when investing in the sharemarket, it's important investors pay a good price for their Telstra shares.
A good price means leaving a healthy margin of safety between what you think the shares are worth and what price you can buy them for.
I previously determined a fair price for Telstra shares was $6.11.
However, although investors can currently buy Telstra shares on market for around $6, the margin of safety is not nearly wide enough to make their purchase prudent.
A better dividend stock idea than Telstra…
