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2 blue chip ASX shares to avoid and 2 to watch

Commonwealth Bank of Australia (ASX: CBA) shares and BHP Billiton Limited (ASX: BHP) shares are two of the most popular on the ASX for dividend income.

However, at today’s prices, I have these two blue chip shares on my ‘avoid’ list.

Commbank

Over the past 26 years, Commbank has enjoyed spectacular success with a number of tailwinds (rising house prices, increasing household debt, lower interest rates, etc.) at its back. While I’ll agree that it is one of Australia’s best lenders of capital, its shares are expensive at today’s prices.

BHP

BHP is known as ‘The Big Australian’, all $120 billion of it. However, despite its size and popularity amongst investors, I do not believe everyone should own it. Without any special ability to forecast commodity prices, including the supply and demand of global markets, I believe investors’ money can be better spent elsewhere.

Two alternatives

While Commbank and BHP are not on my buy list today, if you are looking for exposure to quality dividend-paying blue chip ASX shares I think the following two companies are worthy of a closer inspection.

National Australia Bank Ltd. (ASX: NAB)

NAB is Australia’s fourth largest bank. While I am broadly concerned about Australia’s rising debt pile, I think NAB shares are worthy of a closer inspection. Firstly, over the past five years NAB has sold off many of its poorly performing businesses and got rid of the bad loans it incurred during the GFC. Secondly, it has a lesser exposure to housing.

While household lending is undoubtedly a priority for NAB, I believe its tough lending standards and exposure to business banking are more promising. This is in contrast to Commbank, which controls the biggest chunk of the mortgage market.

Telstra Corporation Ltd (ASX: TLS)

I won’t win any awards for originality but Telstra’s forecast dividend is an enviable 7% fully franked. Investors buying into Telstra shares should understand that the company is not expected to grow fast, so its dividend is perhaps the only way you might beat the market.

At today’s prices, a 7% fully franked dividend might beat the market, which has historically averaged 9.9%. However, the reason that Telstra shares are on my watchlist and not in my portfolio is because it is not a bargain at today’s levels. I’ll consider adding Telstra shares to my portfolio when they are at or below $4.

Foolish Takeaway

These four shares are amongst investors’ favourites, having performed well over many years. Moreover, with fully franked dividends, they are even more popular with superannuation funds, which can use the franking credits to effectively neutralise their tax position.

However, it’s important to consider the drivers of value and the potential returns on offer. In my opinion, NAB and Telstra shares are more compelling than Commbank and BHP shares at this time.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of National Australia Bank Limited and Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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