Blue-chips are usually well-loved for good reason. It's no secret that banks such as the Commonwealth Bank of Australia (ASX: CBA) have decent long-term prospects and pay dividends far higher than the rate you'll receive from a term deposit. However, if you buy the really obvious companies, you run the risk that a lot of the lofty expectations are already built in.
Income investors should therefore search for companies that are undervalued by the market, because stock of those companies will rise simply as a result of improved sentiment – often quite likely when it comes to a household name. Even if sentiment takes some time to improve, as long as the company keeps up its dividend, investors will have a steady stream of cash to bolster their confidence.
With that in mind, it's hard to go past Sonic Healthcare Limited (ASX: SHL). Sonic owns medical diagnostic businesses – think radiology and pathology – in seven countries. As a result, the company is not overexposed to any one region. The company currently trades on a yield of 3.8%, although this is forecast to grow. Indeed, Sonic has grown or maintained its dividend every year for the past decade. The share price is up just 3.2% since I covered it at length in this article. I certainly prefer Sonic over its competitors, who have operations more concentrated in Australia.
Coca-Cola Amatil Ltd (ASX: CCL) – the Australian distributor of Coke branded drinks – is another blue-chip company offering a substantial yield of 5.5%. However, that is expected to reduce to about 4.7% in the coming year due, in part, to pressure on margins resulting from big retailers such as Woolworths Limited (ASX: WOW) increasing competition. On the other hand, Coca-Cola Amatil's re-entry into beer distribution should improve the bottom line.
Finally, Woodside Petroleum Limited (ASX: WPL) impresses with its trailing yield of 5.5% although I hasten to add that is quite likely to fall because it is unsustainable at current levels of profit. I think that forecasts of a forward yield of over 6% may be over-optimistic though I think a sustainable yield of over 5% is very likely. One of the reasons Woodside is better than its peers is the laudable humanity and wisdom of former CEO Don Voelte. Voelte is alone amongst his peers in seeing the drawbacks of east-coast coal seam gas and is on the record saying: "Come back and check in four or five years from now. I think one of the greatest things that I'll have achieved is not taking my company into coal seam fracking." I tend to agree.
