When you spend a lot of time examining individual trees, it's easy to miss the rest of the forest.
If the trees you examine happen to be blue-chip dividend stocks then your forest is the S&P/ASX 100 (INDEXASX: XTO) and much of it is burning to the ground.
From some vantage points 2017 looks like the year that killed big dividend stocks. Rather than offering long-term 'safety' many have become giant liabilities.
Various causes, common outcome
Perhaps there hasn't been a single catalyst, but there are some common themes.
ASX listed blue-chip companies are large, entrenched dividend payers operating in mature markets. Markets which have been around for decades.
A natural response in mature markets is to feign growth through acquisitions, bootstrapping earnings growth by buying other companies.
The problem is that very few management teams have the skill and tenacity to deliver the gains promised in the long-term. QBE Insurance Group Ltd (ASX: QBE) and Vocus Group Ltd (ASX: VOC) are companies which have exemplified shareholder wealth destruction through acquisitions.
In other cases blue-chips have left themselves exposed to competition by idiotically chasing short term returns; slashing costs and under-investing in the core competencies they were built on.
There has also been blatant pandering to the demands of dividend seekers. The high demand for dividend yields may have helped prop up share prices over the last two years, but the chickens are now coming home to roost.
If you were banking on Telstra Corporation Ltd (ASX: TLS) shares paying your way to retirement, you have been swindled out of a dividend and watched the company lose 30% of its market capitalisation this year. Vocus is in a similar state.
Where has this money gone? Some of it has certainly gone into technology focused growth companies – the disruptors, the innovators, the future blue-chips.
Existing blue-chips have left themselves vulnerable for disruption from nimble, lower cost competitors so many investors have switched to looking at 'where the puck is going'.
So, what should investors do?
The answer is really the same as it has always been; owning quality businesses with long term, sustainable advantages at reasonable prices. More than ever these companies will be outside the 100 largest listed companies. Stalwarts with big moats like CSL Limited (ASX:CSL) and Sydney Airport Holdings Pty Ltd (ASX:SYD) continue to perform, but command high historical valuations.
As Howard Marks has noted this year, income focused investors, with the benchmark of low returns from term deposits, need to adjust their expectations or accept more risk.
That is simply the forest we live in today.
