Australian blue chips offer mediocre long-term returns

17 June 2016
| By Oksana Patron |
image
image
expand image

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,"

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.

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 1 week ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 1 week ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 1 week ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

3 weeks 3 days ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks 1 day ago

Having divested its advice business in August, AMP is undergoing restructuring in at least four other departments amid a cost simplification program....

2 weeks 5 days ago