The Motley Fool

Why blue chips are not the best dividend payers

The share market is the best place to invest for long-term returns and for income.

However, most investors are drawn to blue chips like Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS).

Australia’s biggest businesses aren’t necessarily bad businesses. Many of them have been delivering large profits and dividends for many years.

However, there are current or future problems for many of them. The imminent arrival of Amazon is expected to hurt the margins of Wesfarmers and Woolworths Limited (ASX: WOW). Record household debt could undo the banks if repayments drop off. The NBN is causing Telstra a lot of problems and future earnings growth is questionable.

There is also the issue of market saturation for most of these blue chips. Australia has a small population and the large caps have already taken a large market share. There isn’t much growth left, except for population growth.

Overseas markets could be opportunities but the big companies seem to be withdrawing from overseas rather than expanding. Sadly, this means there really isn’t much growth on offer at all.

I think there are better options for dividends outside of the ASX20. There are a few different types of dividend stocks that I think are good options:

The dividend growers

Shares that have defensive characteristics and grow the dividend year after year are good options.

Three of my favourite are Ramsay Health Care Limited (ASX: RHC), InvoCare Limited (ASX: IVC) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which have all increased their total annual dividend payments consecutively for more than a decade.

High yields

A high dividend yield alone can be dangerous, however a high-yielding share with a growing dividend can be a powerful combination.

Mortgage Choice Limited (ASX: MOC) and Retail Food Group Limited (ASX: RFG) both have grossed-up yields over 9% and have been growing their dividends for a number of years.

Listed investment companies

If choosing stocks seems too difficult, then you could invest in listed investment companies that do the investing for you. Australian Foundation Investment Co. Ltd. (ASX: AFI), WAM Capital Limited (ASX: WAM) and Clime Capital Limited (ASX: CAM) could all be solid dividend options.

Foolish takeaway

There’s nothing wrong with looking for reliable income but I don’t think the traditional blue chips are the best way forward from here.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited, Ramsay Health Care Limited, WAM Capital Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Retail Food Group Limited, Telstra Limited, Washington H. Soul Pattinson and Company Limited, and Wesfarmers 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.