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Warning: Don't get caught in this investment trap

Samantha Menzies
Senior editor – Finance
Source: Getty Images

If you’re an AMP or Telstra shareholder you’ll know what it’s like to travel along the emotional rollercoaster.

Both companies have suffered structural challenges and intense competition in both core markets – broadband and mobile – and as a result, shares have taken a beating.

TPG dropped its plans to develop its own mobile network and Telstra shareholders rejoiced, sending shares upwards. However, the decision was all part of TPG’s master strategy – remember, TPG wants to join forces with Vodafone Australia and take the fight directly to Telstra, Rask Invest lead adviser, Owen Raszkiewicz warned.

While some investors are sitting tight and praying, it’s yet to be seen if the enormous amounts of capital expenditure will bear sufficient fruit. They’re effectively trapped.

Raszkiewicz points out that the key way to avoid the income trap is to find a business with competitive advantages which they’ve had for years – not just any one advantage.

“I’m talking about wide profit margins, network efforts, a working capital flywheel, extremely high rates of returning customers and sound management.”

“But here’s the thing: despite high expectations, I still get my dividends. And good ones at that!”

How?

He owns Exchange Traded Funds (ETFs) in the Rask Invest model portfolio, gets his dividend frills (and franking credits) from widely diversified, extremely low-cost ETFs trading on the ASX. One click of a button and he can get exposure to an entire portfolio of promising dividend-paying companies. 

“For example, based on last year’s payouts, one of my ETFs has a trailing yield of 4.9%. Even if one of the companies inside the ETF cuts its dividend I’ll still have exposure to more than 100 companies. Pretty good, right?” Raszkiewicz said.

“As you can imagine, I see no reason to buy AMP or Telstra shares for income.”

How to achieve growth

Raszkiewicz explained how he chooses to get a reliable dividend income from ‘core’ ETFs, then adds ‘tactical’ growth from the best individual shares from Australia and around the world.

“I’d fill the core ‘income’ section of my long-term portfolio with the best ETFs I can find, then I’d go in search of the best individual share ideas (from the ASX and aboard),” he said.

“I think it’s such a simple and effective way to invest, with a diverse ‘core’ plus the best individual shares in a ‘Satellite’ – it continues to amaze me that people spend/waste their time owning mediocre shares and worrying about short-term volatility.”

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