Investors now know that a simple strategy of investing in blue chip shares just isn't as safe as it arguably once was.
The figures speak for themselves. Over the past one, five and ten years, the return (excluding dividends) from holding the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been -11%, 7% and 1% respectively.
Meanwhile, here are the returns from a handful of widely-owned blue chips over the same time frames:
- Woolworths Limited (ASX: WOW): -21%, -15%, 21%
- National Australia Bank Ltd. (ASX: NAB): -30%, 4%, -25%
- CocaCola Amatil Ltd (ASX: CCL): -17%, -26%, 21%
- Rio Tinto Limited (ASX: RIO): -11%, -42%, -41%
If there is one takeaway from this experience it would surely be the fallacy that investors can "get set and forget" when it comes to owning blue chip stocks.
When looking to identify a defensive, low-risk stock for your portfolio there are a number of key criteria to seek out. These criteria include:
- Strong balance sheet
- Managers who act like owners
- Pricing power
- Leading market position
- Available at a reasonable price
Sometimes the hardest criteria to meet is the ability to acquire the shares of a high-quality company at a reasonable price. It's not a criterion which can be ignored however, as even if the underlying business continues to perform well for many years, if your entry price is above fair value then you may experience negative investment returns despite solid underlying business performance.
Here are three companies which all exhibit the criteria outlined above and importantly (in my opinion) are currently selling at attractive prices for the long term, conservative investor:
According to data supplied by CommSec, the above three stocks are trading on 2016 price-to-earnings multiples of approximately 13x, 14.5x, and 18x respectively.
