Small investors have some clear favourites when it comes to playing the stockmarket.
They like household names such as Telstra, BHP Billiton and, of course, the big banks.
Unfortunately, though, the most popular blue-chip stocks have performed pretty poorly over the past year.
Telstra, which has the largest number of retail shareholders, has spectacularly bucked this trend, thanks in part to its multibillion-dollar agreement to shut down its network to make way for the National Broadband Network. The insurance company IAG has also performed solidly.
But none of the other top stocks have posted meaningful capital gains and many have lost value.
Investors in BHP Billiton and AMP have seen their assets fall by more than 20 per cent.
For all the bad news on share prices, however, dividends have remained solid.
If you compare today's price with historic dividends known as the dividend yield many blue-chip stocks start to look more attractive.
Bank stocks, for instance, have a dividend yield of 8 per cent to 10 per cent much more than returns on term deposits.
But before being seduced by the lure of high dividends, many analysts urge people to think twice.
After all, share prices have fallen for a reason.
While today's prices might look attractive compared with past dividends, in many cases the markets aren't expecting the past performance to continue. This is especially true in some of the most popular sectors.
For financial sector stocks, which make up six of the top 10, profit growth is expected to slow because households and businesses just aren't borrowing as they used to.
With house prices in the doldrums, the annual rate of credit growth by owner-occupiers has slumped to its slowest pace since 1991.
Mining companies, which are heavily exposed to global conditions, are no longer receiving the free kick to profits from rising resource prices.
China's growth has slowed to a (still rapid) pace of about 8 per cent, and the race to dig up more minerals around the world has increased global supplies of key commodities.
Most agree resource prices have now peaked.
For these reasons, it's important to put the attraction of high yields into perspective.
Frequently Asked Questions about this Article…
Which blue‑chip stocks do small investors typically prefer?
Small investors tend to favour household names and familiar blue‑chip stocks such as Telstra, BHP Billiton and the big banks, according to the article.
How have popular blue‑chip stocks performed over the past year?
Most of the most popular blue‑chip stocks have performed poorly over the past year, with few posting meaningful capital gains and many losing value, though Telstra and insurer IAG performed solidly.
Why has Telstra bucked the downtrend in other blue‑chip shares?
Telstra has outperformed in part because it has the largest number of retail shareholders and secured a multibillion‑dollar agreement to shut down parts of its network to make way for the National Broadband Network (NBN), which boosted its performance.
Which major companies have seen significant share price falls and how big were the losses?
Investors in BHP Billiton and AMP have seen their assets fall by more than 20%, the article notes.
Are dividends still attractive on blue‑chip stocks and how does dividend yield compare?
Yes — dividends have remained solid. When you compare today’s prices with historic dividends (the dividend yield), many blue‑chip stocks look more attractive; bank stocks, for example, were yielding about 8–10% — well above term deposit returns.
Should everyday investors chase high dividend yields right now?
Analysts urge caution: high dividend yields can be tempting, but prices have fallen for a reason and markets may not expect past dividend performance to continue, especially in some popular sectors.
What headwinds are facing financial sector stocks and bank profit growth?
Financial stocks face slower profit growth because households and businesses aren’t borrowing as much as they used to. With weak house prices, annual credit growth by owner‑occupiers has slumped to its slowest pace since 1991, which pressures bank earnings.
Why are mining companies no longer getting the same profit boost from commodity prices?
Mining companies are exposed to global conditions: China’s growth has slowed to about 8% and increased global mining activity has raised supplies of key commodities. Most observers now agree resource prices have peaked, removing the recent tailwind for miners.
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