5 High-Income Blue Chips On The March

Published in Investing on 18 July 2012

... include AstraZeneca (LSE: AZN), Aviva (LSE: AV) and BAE Systems (LSE: BA)

Patient investors rejoice.

Finally, high-yielding blue-chip shares are seeing a bit of action. Everybody has been banging on about how cheap these giants look for some time now, but so far to no avail.

But perhaps the worm is turning. Perhaps investors are waking up to the merit of investing in such boring companies.

I'll talk a little more about some of the shares on my radar a little further down, but first some context.

Making millions from pennies

The day-to-day movements of the market and individual share prices are dominated by traders working at investment banks and hedge funds. Much of the trading is done by computers using highly sophisticated software programmes, the goal being to make a penny or two on thousands of high-frequency trades.

(As an aside, if you decide to actively trade shares for a living, understand what you are up against. Day traders sitting at home have little chance against such resources. Don't do it, would be my advice.)

All this computerised trading can result in share prices moving in weird and wonderful ways. For example, some days you might find the share price of your favourite blue chip is down three or four percent, for no apparent reason.

Taking no prisoners

That's computers for you. They take no prisoners. They don't care about the collateral damage. They trade the share price, not the company.

People with slightly longer investing perspectives than a few seconds should not be worried by the faceless computerised traders. All they do is change share prices. They don't change businesses.

As all true investors will know, ultimately it's the performance of the company that drives the share price, not the other way around.

Bagging yourself a bargain

True investors will also know they can use the irrationality of faceless computers to their advantage. Should the computers have it in for one of your favourite companies, marking the share price down to an irrational low, you can calmly step in and make a purchase -- and bagging yourself a bargain in the process.

Then, you simply wait. Presuming you bought a good company at a good price, over time, you should be rewarded with a rising share price.

Time is the key here, and the luxury of time is the biggest advantage individual investors enjoy over the faceless computers. You see, we are only accountable to ourselves. We aren't under any short-term pressure to generate exceptional profits. We aren't going to be fired if we have a bad week, month or quarter.

The people behind the faceless computers don't have the luxury of time. Perform now, or be sacked.

Blue chips on the march

In contrast, individual investors can sit back and wait for our investments to come good. If you bought a good quality company at a cheap enough price, providing the company performs to expectations, over time, the share price should rise.

Over the past few weeks, a time in which the market (the faceless computers) has been somewhat nervous, the share prices of some generous-dividend blue chips have been on the march. For instance, during the last month:

They were significant price moves for such large companies, especially when the FTSE 100 moved just 3% higher. 

In fact, looking at those five shares again:

  • AstraZeneca raised its latest dividend by 10% and, at 2,958p, still yields a forecast 6.2%.
  • Aviva lifted its latest dividend by 2% and, at 292p, still yields a forecast 8.6%.
  • BAE Systems upped its latest dividend by 7% and, at 304p, still yields a forecast 6.4%.
  • Resolution increased its latest dividend by 10% and, at 223p, still yields a forecast 9.1%.
  • J Sainsbury improved its latest dividend by 7% and, at 314p, still yields a forecast 5.2%.

Dividend yields of 5% or more can only last for so long when cash and gilts yield next to nothing. Eventually, something has to give.

On the downside, either the economy tanks, the company disappoints or interest rates rise. We can all rule out the latter, with interest rates set to stay at their emergency low levels for some time to come.

As for the economy, the great fear among investors and the people behind the faceless computers is the dreaded eurozone collapse and/or a global depression. I contend it's unlikely to happen, and even if it does, I'll still be here, rubbing my hands as the market crashes and buying top-notch shares at rock-bottom prices.

Finally, there is company risk. There is always company risk. But with large, established blue chips, especially those selling repeat purchase goods and services, the risk is lowered. But there are no guarantees. There never are. 

Putting the odds in your favour

Investing offers you choices. Right now, you can choose to sit on the sidelines and do nothing, fearful of a eurozone collapse, an economy that never recovers and/or another lost decade for leading shares.

Or you can choose to bet on good-value, good-quality shares that should slowly but surely recover in the years ahead.

Obviously, what you decide is up to you. But for what it's worth, you might want to consider the actions of investment ace Neil Woodford.

You see, Mr Woodford certainly knows a thing or two about successful share-picking. His Invesco Perpetual funds now total some £20 billion after trouncing the wider stock market over the last five, 10 and 15 years.

Right now, Mr Woodford is backing a collection of dependable, defensive dividend-paying FTSE 100 names -- the identities of which can be discovered in this free Motley Fool report.

True, Mr Woodford admits he is not 100% certain about the economy, but he, like me, has weighed up the odds and placed his bets accordingly.

Whatever you decide, I wish you the best of luck.

PS: You can download "8 Income Shares Held By Britain's Super Investor" immediately. But hurry, the report will remain free for a limited time only.

Important! Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's 100% free.

Further Motley Fool investment opportunities:

> Maynard does not own any shares mentioned in this article.

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Comments

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alarmbells 18 Jul 2012 , 1:37pm

An interesting dichotomy occurs to me.

Why are these shares on such low ratings and high yields when at the same time Woody's IT trades on a whopping premium - indicating HY investing is top of the pops?

In other words UK investors are behaving absurdly by buying a collection of shares they could pick up at par, for 8% more than par.

Now (as MF never ceases to mention in every flippin' article) Woody's a mega star. But is he that good? 50% of his fund is in easily accessible UK HYers. He's succeeded not because his picks have rocketed but because his omissions have flopped.

Come on you lazy IT oiks. Ditch the IT and buy some of these cheap and cheerful HYers!

F958B 18 Jul 2012 , 2:24pm

alarmbells

You said:
<< "....He's succeeded not because his picks have rocketed but because his omissions have flopped...." >>

My motto - in my profile - is:

"An expert is someone who knows how to avoid making the worst mistakes"

So that makes Woody an expert.

But he's not perfect - and with his largest holdings, are they large because:

1. He's enthusiastic about them in the medium-term.

- or -

2. The shares have appreciated and he's soon going to take profits.

- or -

3. He's just found a better opportunity and will soon be re-allocating the money from his biggest holdings.

?

So we should be careful when implying what a large portfolio allocation means.
SSE are my biggest holding, but, having appreciated from £10 to £14 in the last two years to become easily my biggest holding, and with my eye on a new addition to my portfolio, it may well be SSE that gets the chop.
On the other hand, TSCO are my second-biggest holding (I disagree with Woody in TSCO), but I have recently been adding to my TSCO holding and a sale is very unlikely in the forseeable future unless TSCO put out a trading statement which makes a "material difference" to my investment case assumptions.

alarmbells 18 Jul 2012 , 3:27pm

Talking of Woody (as indeed we must) he's come guns a blazing in support for nasty Nick at G4S.

'twill be interesting to see if the Guru's chosen the right course...

I agree with you on TSCO.

F958B 18 Jul 2012 , 4:29pm

alarmbells

G4S are the "my eye on a new addition to my portfolio" mentioned above.
They appeared on my tracking list in my profile last week and it might be SSE that get a haircut to fund part of the purchase.

My main hesitation is my slow T+10 certificated dealing; it'd be early August before I received the proceeds from trimming SSE, and by then G4S share price could be anywhere (up or down) and I don't like chasing.

duffmanchon 18 Jul 2012 , 5:36pm

Perhaps the recent Olympic shambles will be the final straw in UK outsourcing/privatisation.... I heard the presenter on LBC radio this morning ranting for about half an hour about them, maybe a sign public opinion is changing on Thatcherism. Labour is talking about renationalising the railways and Woody has sold out of utilities as he doesn't like the regulatory environment. However we will still need weapons, drugs and life insurance so I am happy to hold the 3 stocks featured above.

ANuvver 18 Jul 2012 , 6:39pm

Ha-ha-ha-ha-hah..., it's the Motley Fool Woody Show...

To be fair, it has indeed been a remarkably good day to be blue. And this past year I've been bored to tears by 11% cap gain on my widows'n'orphans stuff, yielding 5%-odd on top.

Range-bound on low volume for a liitle while now, I feel.

goodlifer 18 Jul 2012 , 8:41pm

F958B
"SSE are my biggest holding, but, having appreciated from £10 to £14 in the last two years to become easily my biggest holding"

Interesting.

Unlike you, I gauge the size of my holdings by what I paid for them rather than their paper value.

What are the pros and cons?
What do the experts think?
Or am I right to think it doesn't matter that much?

F958B 18 Jul 2012 , 11:10pm

Hi goodlifer

It's not so much about price or how much "profit" I've made on SSE, or how much I paid; it's more about how much of my portfolio's current paper value I am prepared to hold in a share which is now close to fair value after a strong run - especially as I might well have a more lucrative opportunity shortly.



F958B 18 Jul 2012 , 11:28pm

Regarding allocation......

I gave the following general guidelines on the discussion boards recently:

----------------------------

I would suggest most investors consider something like the following guidelines:

1.
No more than 5% of portfolio in one company.

2.
No more than 10% in one sector.

3.
Shares which persistently decline may not be topped-up ("averaged down") if their total purchase cost exceeds 7.5% of portfolio's value; there's no point continuing to throw good money after bad. This rule would eventually allow top-up of a really bad performer, as long as other holdings had been topped-up first (or new ones purchased), to increase the portfolio size.


.

goodlifer 19 Jul 2012 , 3:59pm

Hi again F958B,
Never a dull moment.

My SSE are up about 27% on what they cost me, but at about eleven times earnings and a yield of about 6%, I'm hanging on.

On the other hand about a month ago I sold half my VOD - up 52%, numbers otherwise very like SSE's.
With my usual impeccable timing I used the proceeds to buy into Barclays!

As Barclays are obviously very much "on the operating table," I've bought a few more, comfortably below the averaging down limit you suggest.

At less than six times earnings, yielding about 4% covered more than four times, you've got to admit they were cheap.

Cheap at half the price?

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