Australian blue chips offer mediocre long-term returns

Australian investors tend to have their equity portfolio's heavily skewed to the blue chips which only provide investors with mediocre long-term returns unless they speculate successfully on the price to earnings ratio, according to Montgomery Investment Management.

The firm noticed that the reason for this was that most of the large cap companies in Australia, which dominated the major stock market indices, were mature businesses with little ability to retain any sizeable proportion of their annual profits to reinvest at an attractive rate of return.

Chief investment officer, Roger Montgomery, said: "When the companies pay out more than they earn they don't grow".

According to Montgomery, the dividend yield is usually the maximum return an investor would receive as it all "comes back to dividends and capital allocation".

"In simple terms, if you chase a high yield and the company pays all of its earnings out as a dividend, the yield is about all you should expect,"

VIEW ALL

View all

Also, he stressed that without the growth in earnings, there can be little growth in dividends.

"Only by retaining a large portion of profits and redeploying those profits at high rates of return, can a business increase in value. And in the long-run share price always follows the change in value," he added.

For the past 10 years to June 2016, the S&P/ASX 100 stock market index, measuring Australia's top 100 companies by market capitalisation and accounting for 63 per cent of the Australian equity market, has returned only 1.1 per cent per annum.