We do live and invest in amazing times.

The most stunning development on my screens in front of me is the record low yields in long-term government bonds. As I type this today the average developed world 10-year government bond yield is just .61%, yes .61% for 10 years.

Below is a chart of the Bloomberg Global Developed Sovereign Bond Index over the last year. It made fresh all-time yield lows this month.

Now let’s look at a table to compare individual developed country 10 year bond yields. I still can’t believe I’m typing these figures but they are the reality of the day.

• Australia 2.16%
• New Zealand 2.60%
• United States 1.71%
• Canada 1.21%
• United Kingdom 1.26%
• France .40%
• Germany .04%
• Italy 1.41%
• Switzerland -.47%
• Japan -.12%

Obviously, some of this is driven by QE activities of the ECB and BOJ, yet these are the current “risk free rates” the world currently sees.

The table above confirms record low long bond yields globally, yet Australian and New Zealand 10yr bond yields are still relatively high by global standards, despite also making fresh record lows this month.

So what does this all mean for Australian based equity investors?

It means the bond market is pricing a very extended period of low global growth, low inflation and ultra-low interest rates. It’s worth noting the bond market is the biggest, deepest market in the world and so far they have been RIGHT in pricing an extended period of low global growth, low inflation and ultra-low interest rates.

It also means the so-called “yield trade” on equities is far from dead: it’s arguably never been more ALIVE in Australia or globally. This is particularly so since the RBA cut the cash rate to the record low of 1.75%.

The scramble for sustainable equity dividend yield will continue, driven by ultra-low cash rate/fixed interest alternatives meeting an ageing population. This doesn’t mean I recommend losing all discipline and paying any price for dividend yield, but it’s hard to see the superannuants of Australia selling their reliable equity dividend streams (plus highly valuable franking credits) in this environment. In fact, it’s every easy to see them switching further from term-deposits to equities.

I also believe the price paid for dividend GROWTH will rise in P/E terms as professional and individual investors hunker down for what could be a decade of ultra-low cash rates, if the bond market is proved right.

The conclusion I come to is whether dividend yield and franking credits are going to play an EVEN GREATER ROLE in the total return provided by Australian equities over the next few years. Historically, dividend yield has generated 60% of the total return of Australian equities, but I strongly suspect that’s going to rise as a proportion of total pre-tax return to Australian investors. 

The only warning I will give you is NEVER, EVER, EVER buy a resource stock or mining services stock purely on its prospective dividend yield. If the forecast yield seems too good to be true, it probably is.

What I try to find for my fund is dividend growth and/or dividend certainty in the forecast period 12 to 18 months ahead. Of course, nothing is truly certain in investing, but you can increase the chances of being delivered the dividends you expect via investing in low regulatory risk, low cyclicality, high barrier to entry industrial business.

You are all well versed in my high conviction on monopoly infrastructure, such as toll roads, ports and airports (TCL and SYD, my key picks), but other industries that fit the description above are destination casinos (SGR, SKC), wagering companies (TTS), telecommunications companies (TLS), packaging companies (ORA) and parts of the industrial property trust sector (GMG). It’s a somewhat boring and predictable list, but boring and predictable is going to continue to outperform the broader market from a total return perspective in my opinion.

That total return outperformance could well be the ASX200 going sideways and the right industrials delivering a 6 to 9% pre-tax yield. It could well be the income and franking credits that deliver performance over the benchmark price index.

On Peter’s TV show on Tuesday night, we did have a discussion about the underperformance of the 20 largest stocks in the ASX200. That is a key debate right now as the 20 largest stocks have underperformed the ASX200 over the last year. The green line is the AS20. The white line is the ASX200.

This underperformance of our 20 largest stocks does beg the question: will this underperformance last and/or is there any value in our 20 largest stocks?

I’ll try and answer that question over the weeks and months ahead but I did tell Peter in the interview that the one ASX top 20 stocks we do own is Telstra (TLS), feeling the dividend is secure and the likelihood of a capital return increasing.

Telstra traded up to $5.78 after the RBA rate cut but has subsequently pulled back to $5.50. I think around $5.50, TLS is worth accumulating ahead of the FY16 final dividend in August and potential capital return (that would most likely involve valuable franking credits).

TLS is trading above the 200 day moving average at $5.45, at technical support level that I think will hold.

At $5.50, the prospective FY17 dividend yield is 5.80% fully franked. That DOES NOT include any special dividend or capital return forecast. That will be a nice bonus.

At a grossed up prospective yield of over 8%, with the positive risk on top of a special dividend in August, I continue to believe I am being paid a substantial yield risk premium over long government bonds to own TLS shares. Even if TLS shares went sideways from here, the return would most likely beat the market over the year ahead due to the grossed up yield stream alone.

Of course, there are always risks. The biggest risk in TLS comes from price competition in mobiles. That could see margins fall a notch. But we will only know that when the FY16 result is released in August. Again, I believe that’s an acceptable risk particularly given the yield premium I’m being paid.

Today, I thought I’d finish by republishing my Telstra thesis from April. None of what I wrote below has changed and I’m basically getting another bite at the TLS cherry, yet since April, the RBA has cut the cash rate and global bond yields have plumbed fresh lows, making TLS even more attractive from my perspective.

From April.

Investing is full of choices. You can buy an Argentinian 10yr bond on an 8% yield or Telstra on a 6% fully franked yield…I choose TLS. 

Today I want to write about why I think the worst is behind Telstra’s share price and why TLS’s should deliver solid total after tax returns from this point. I forecast capital gains, dividend growth and franking credits in a world where reliable income streams will continue to be sought.

In an Australian context, I have tried to consistently make the point over dividend growth and dividend sustainability over pure short-term dividend yield. In a world where the average 10yr bond yield is 1.30% (record low), it is tempting, yet will prove a huge mistake, simply to buy high prospective short-term dividend yields. Anyone who bought resource or mining services stocks for yield had learnt this lesson the hard way.

My view remains that interest rates are going to stay low (or even lower) for a VERY LONG TIME. I believe we are in a low growth, low inflation world where government’s and corporates are not spending, in fact, they are cutting back on spending and capex. Most companies favour share buybacks over capex. Without corporate or government spending, it means the sole tool is Monetary Policy and as you can see that is getting to the point of pushing on a string.

Interestingly, RBA Governor Glenn Stevens confirmed that view in a speech in New York this week when he said “it is surely time that policies beyond central bank actions did more in this regard (foster growth)”. In terms of the effect of monetary policy, he also said “but surely diminishing returns are setting in”. He is 200% right in my view and ANY investment strategy that relies solely on central bank largesse is flawed in my view. That is why my investments focus on structural growth where I can find it in Australia and around the world. There are always companies growing, even slowly, in a world where growth is hard to find and central bank bullets are becoming less and less effective on asset prices.

Obviously Telstra has been a disappointing performer over the last year. The shares have dropped but I think the worst is behind the share price for a variety of fundamental and technical reasons.

Firstly, the initial move down in TLS was a global sell off in high dividend yield defensive stocks on the view that the Federal Reserve would raise interest rates this year and bond yields would rise. The complete opposite has occurred. The Fed appears on hold and bond yields have raced to new lows.

The second leg down in TLS shares were concerns about the sustainability of the dividend on the basis TLS management was intent on spending money on new growth initiatives. Recently the complete opposite has occurred with TLS backing away from an expansion in the Philippines and also reaping a $2.1b windfall from the sale of their stake in US listed Chinese car website Autohome (ATHM). Those two events have completely changed perceptions about the sustainability of the dividend and rightly so in my opinion.

The final leg down was driven by the series of mobile network outages recently and a view that competition was increasing in Australia. While the network outages were unfortunate and a frustration, I remain of the view they were not a sign of any structural problem in TLS network and most likely marked the nadir of sentiment towards the stock. I also don’t believe competition has markedly increased in Australian telecommunications and that TLS maintains a major network advantage over all competitors.

During all this noise, consensus analyst forecasts for TLS changed very little. This is an important point. Below is a chart of TLS consensus FY16 EPS estimate and the TLS share price. Note very well over the last 12 months TLS share price has fallen from $6.40 to $5.40 (-15.6%), while EPS estimates are down -4.5%. Also note well the recent POSITIVE EARNINGS REVISIONS FOR TLS (red line). The first in 12 months.

Now let’s look at consensus TLS dividend per share forecasts vs the share price. During the same period, TLS shares fell -15.6% yet consensus FY16 annual dividend forecast fell from 32c to 31.5c, or just -3.1%.

Really all we have seen is TLS experience a PE de-rating over the last 12 months from around 17.5x to 15.2x.

Conversely, TLS prospective FY16 dividend yield has risen from just under 5.00%ff to just under 6.00%ff.

Technically, TLS shares have broken a basic downtrend line while they have also broken the 50 and 100 day moving averages. The important 200-day moving average lies at $5.57 and will be challenged shortly in my opinion.

Broadly I have confidence in TLS under CEO Andy Penn. I think Andy will sail a steady ship as evidence by walking away from Philippines and booking a huge profit in the sale of Autohome. I also thought he handled the PR nightmare of the network outages pretty well given the circumstances.

As I mention above, it was very pleasing to see analysts react to these developments by UPGRADING TLS consensus EPS forecasts for the first time in 12 months. To me, that is a fundamental inflection point in TLS and it’s a classic example of the knife sticking in the deep value floor. That’s why I picked up the vibrating knife (bought some) even at share prices a little above recent lows.

To me, TLS is all about the dividend and the dividend appears secure to me. As investors and analysts come around to this view I would expect TLS to experience a P/E re-rating driven by dividend yield compression. My first price target is the 200-day moving average at $5.57 and if I jumped that hurdle, it is not outrageous to forecast TLS to recover to $6.00, which would represent a 5.25%ff  FY17 dividend yield.

It’s worth noting analysts currently forecast TLS’s FY17 dividend to RISE from 31.5c to 32.3c. That’s +2.5% dividend growth in a world where resource dividends are going backwards and bank dividends will be flat at best. Woolworths dividend is also at risk which means almost the entire top 20 in Australia offers flat or falling dividends, while TLS is RISING. This is the key point of today’s note.

The final star that aligns for TLS outperformance is the Federal Election. Obviously, long campaigns can create uncertainty and we have already seen Qantas warn on domestic demand due to consumer confidence falling ahead of the election. Estate Agent John McGrath also warned on very slow Sydney property sales. Whether that’s true or not, it’s a convenient excuse that more Australian companies will use over the next few weeks and months to explain weak sales.

All in all I believe the worst is behind TLS on all fronts and for the first time my fund now owns TLS shares. I think they are now cheap and have dividend certainty. I also think they will outperform the ASX200 on a total return basis from this point.

Put it this way, if over the next 18 months the TLS share price did recover to $6.00, the capital gain would be +10% and 18 month dividend yield 8.8%ff, Add on the value of franking credits and there is the potential for a +20% total return in TLS over the next 18 months if I am right and the recovery continues.

Of course, it all needs monitoring as we progress but I think this is a major turning point for TLS and I’ve put my funds money where my mouth is.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.