Defensive investors love blue chip stocks with competitive advantages, scale and – perhaps most important of all – generous dividend yields.
However it is fraught with risk assuming a company's track record and dividend yield guarantees future success. Just ask long-term National Australia Bank Ltd. (ASX: NAB) and Newcrest Mining Limited (ASX: NCM) investors who've watched the share prices of both companies fail miserably to beat the market over the past 10 years.
Sure, dividends have provided some relief and each stock has, at some point, outperformed the S&P/ASX 200 (INDEXASX: XJO). However neither have been standout performers, over time.
So before even trying to value a company, getting to know a business in a qualitative sense, is absolutely essential because it minimises the chances of making a significant capital loss.
Here's what investors need to know…
NAB, our largest bank by assets, has struggled to beat the market because of its UK Banking exposure which includes the Yorkshire and Clydesdale banking brands. In the wake of the GFC, NAB's UK businesses felt the full force of a slow economy and emerged with a huge portfolio of bad commercial property loans. Even today, these loans hinder the bank's profitability.
Although NAB boasts the biggest dividend yield and trades on a lower price-book multiple than its peers, it faces a number of uncertainties moving forward such as misconduct charges and a Scottish independence vote. In addition to these key risks, I think shares in NAB are still overvalued at today's prices.
Newcrest Mining is a great investment so long as the gold price remains strong. Unlike say copper, gold has very little commercial use and market prices are extremely volatile because they're fuelled by speculation and the seemingly flawed assumption that it is a hedge against uncertainty. In recent times, it appears the assumption has been proven wrong. Aren't we experiencing just as much (if not more) geopolitical risk, economic instability and threats of terrorism as we were in 2012 – when gold was fetching 50% more than it does now?
But if you're looking to get gold exposure in your portfolio, Newcrest has the benefit of huge reserves, is geographically diversified and a relatively low-cost producer. However it's far from a risk free investment and unlikely to pay a dividend in the coming 12 months. As a result, it's not a stock I'll be adding to my portfolio anytime soon. I'd consider buying Northern Star Resources Ltd (ASX: NST) first.
Unlike NAB or Newcrest, I believe Woolworths Limited (ASX: WOW) is an example of a quality defensive business which income investors should consider buying for the long haul. However, at current market prices the supermarket giant appears to be fully – if not over-valued. I believe its current share price will only prove to be a fair one, if it grows its dividend and earnings per share in excess of current analysts' forecasts of 6% per year. If it can't – and I'm sceptical – I believe it'll fail to beat the market, from here.
A better dividend stock than these 3 – Yours FREE!
