Blue-chip stocks can make for great long-term investments. With generous dividends and modestly growing earnings, the benefits derived from holding a successful blue-chip company in your portfolio are nearly second to none.
Three perfect examples of this are Macquarie Group Ltd (ASX: MQG), Woolworths Limited (ASX: WOW) and BHP Billiton Limited (ASX: BHP). Up a healthy 127%, 25% and 21% in just the past three years, not including dividends.
The question on everyone's mind is: "Can they go higher?"
Macquarie Group
Despite being Australia's largest investment bank, few investors would be aware of Macquarie's dominance across a broad range of financial products because it derives over 68% of income from overseas markets. Funds management, mortgages, M&A, commodities research and specialised banking services are just some of the products offered by Macquarie.
Although its stock has risen strongly in recent years, Macquarie will benefit from rising investor confidence in global markets in the near term. It is forecast to pay a 4.8% dividend.
Woolworths Limited
Everyone knows Woolies because of its successful grocery business, which is still expanding today. What some may not know however is that Woolies also owns Masters home improvement stores, a direct competitor to Bunnings Warehouses – owned by Wesfarmers Limited (ASX: WES). Masters is not yet profitable but presents as a viable growth prospect moving forward.
Whilst the supermarket giant's shares have grown exponentially over the past 10 years, growth is likely to be slower within the groceries business in the medium to long term, despite a rollout of new stores. With growing international competitors offering, arguably, a better service, its best days could now be behind it. Although a profitable Masters business provides scope for long-term gains, I believe its current share price has these gains fully priced in.
BHP Billiton
In the past few years, mining has been the unloved sector of the Australian stockmarket – the S&P/ASX 200 RESOURCES Index (ASX: XJR) (INDEX: ^AXJR) is down 15% in the past five years, whilst the broader S&P/ASX200 Index (ASX: XJO) (INDEX: ^AXJO) is up nearly 20%.
Thanks to its diversified operations however BHP Billiton has been somewhat sheltered from the selloff in iron ore and coal miners, despite deriving a big portion of earnings from these two commodities. Looking forward BHP will cut costs and focus on its Four Pillars strategy which includes the commodities iron ore, coal, copper and petroleum.
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At $38.30 per share, I think BHP will make a good long-term buy and is the best investment of the above three companies. With reduced capex and cost-cutting on the agenda it's likely management will increase its dividend payout beyond the forecast 3.3% fully franked yield that is expected in the coming 12 months.
