Sunday, 17 July 2011

Blue chip shares that pass the test of time for investors

BHP Billiton and the big banks may be the most popular stocks, but other blue chips have delivered investors better long-term growth.
Research by Macquarie Private Wealth examined our biggest stocks and found almost all had good average annual growth in the long term.
Just 18 stocks that are in the current S&P/ASX50 index of the 50 biggest companies were around in 1980.
The best performers have been Coca-Cola Amatil, Leighton Holdings, News Corporation and QBE Insurance.
The only stock to suffer a negative annual growth was property trust GPT Group, at -1.4 per cent, after it plunged from $19 to $2 a share during the global financial crisis.
Macquarie Private Wealth head of research Riccardo Briganti says building a blue-chip share portfolio requires more than just picking the best historical performers.
"Each stock has had periods of poor performance not necessarily related to market movements," he says.
"Coca-Cola Amatil had three consecutive years of poor performance in the late 1990s when the broader market was providing above-average returns. It then outperformed the market in the subsequent five years."
Several of today's biggest companies were not listed in 1980, with the Commonwealth Bank joining the ASX in 1991 and Woolworths in 1993.
A blue-chip stock derives its name from the tokens used in casinos where, traditionally, the blue chip was the highest-value, Mr Briganti says.
But, he says, instead of a speculative gamble, they are "the stocks seen as appropriate for a buy and hold strategy".
"Don't be fooled when someone says: 'This stock has given you the best return and therefore it's the best investment'. How risky is it?"
Mr Briganti says a solid blue-chip portfolio should hold at least 10 stocks to be properly diversified, and investors should make their decisions based on dividends as well as capital growth.
Healthy dividends are a key reason for the banks' popularity among investors and super funds.
"The capital return of BHP has averaged 13.3 per cent per annum since 1980, compared to ANZ's lower capital return of 9.8 per cent," Mr Briganti says.
"However, the dividend yield from ANZ has consistently been above 4 per cent whereas BHP has recently been closer to 2 per cent."
Macquarie's 12-month dividend forecasts for the big banks are all above 6 per cent, with franking credits lifting the after-tax dividend yield further.
Australian Index Investments says the banks' after-tax dividend yields should top 9 per cent next financial year, thanks to the 30 per cent tax credit that investors get for fully franked dividends.
It says bank shares have underperformed the broader market over the past year and their dividend income is now "substantially higher" than term deposits.
"A more attractive and tax-effective option might be using those term deposits to buy bank shares," Australian Index Investments chief executive Annmaree Varelas says.
The overall market has dropped sharply in the past month, but Mr Briganti still sees steadier times ahead.
He says Macquarie's forecast for the S&P/ASX200 index is 5190 points by June 2012, a rise of 13 per cent above current levels, despite renewed fears about European debt and money printing in the US.
"We believe that these issues are transitory and (are) going to be resolved. If you look at the underlying economic growth of the world, it's solid."
But investors are growing more uncertain, with a new survey by the Australian Investors Association finding the number of people bearish about the future has more than doubled since January to 35 per cent.
The proportion of investors bullish about shares has dropped from 31 per cent in January to just 11 per cent in May.
"Our members remain cautious about how they approach markets for the rest of this year," AIA president Alison Harrington says.
And while many of us can't stretch out budgets to snap up Rio Tinto shares at $80-plus or BHP and Woodside Petroleum at $40-plus, there are many cheaper stocks listed on the S&P/ASX 50.
Those under $10 (latest price June 10) include AMP, Alumina, Bluescope, Fosters, Brambles, Tabcorp and Fortesque.

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