The term blue-chip stock can have different meanings to different people, however, it's commonly considered to be reserved for the very largest companies.
How large exactly? We're talking market capitalisations measured in billions – in fact the average market cap of constituents in the S&P/ASX 50 (INDEXASX: XFL) is $22.6 billion!
Because it houses the largest stocks on the ASX, this index represents around 63% of the total Australian equity market capitalisation. What's more these stocks are highly liquid and the companies are nearly always leaders in their particular industry.
For this particular screen, first, I limited the field of candidates to the S&P/ASX 50. Second, I removed any stocks that pay only partially franked or unfranked dividends. Of particular note, the removal of unfranked dividend payers effectively removed most property sector stocks.
It's important to be forward looking, not backwards looking, when selecting investment candidates – to achieve this I considered the future expected yield of the screened stocks rather than the historic yield.
Analyst consensus data was obtained from Morningstar to forecast the expected dividend yield for their respective current financial years. These near-term forecasts should be reasonably accurate considering many of these top-50 companies have recently provided guidance to the market upon announcing their full year results in August.
Here are the results of the screen:
Insurance Australia Group Ltd (ASX: IAG): share price $6.04, forecast dividend 38.2 cents per share (cps), yield 6.3% fully franked (FF).
National Australia Bank Ltd. (ASX: NAB): share price $31.92, forecast dividend 201 cps, yield 6.3% FF.
Westpac Banking Corp (ASX: WBC): share price $32.25, forecast dividend 189.1 cps, yield 5.9% FF.
Telstra Corporation Ltd (ASX: TLS): share price $5.29, forecast dividend 30 cps, yield 5.7% FF.
Australia and New Zealand Banking Group (ASX: ANZ): share price $31.22, forecast dividend 176.7 cps, yield 5.6%.
The usual suspects
Perhaps not surprisingly, the major banks and Telstra are some of the most desirable blue-chip stocks to own based purely on dividend yield. Although Insurance Australia Group (IAG) appears at first glance to be the most appealing based on yield, IAG's dividend payment is forecast to decline over the next two years. This suggests that the high rate is in fact compensating for the negative growth profile of its dividend, making Telstra and the banks appear the better options.
