A couple of years ago, when people thought of blue chips I'm sure the main ones they'd name would be Telstra Corporation Ltd (ASX: TLS), the big banks like Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).
However, the performance of all of the above companies goes to show that just because you're among the biggest companies in the country doesn't mean you're going to generate decent capital growth.
There is a way to own blue chip businesses that are market-leaders in Australia, you just have to look a little further down the market capitalisation list. Here are two candidates for a good blue chip retirement:
Insurance Australia Group Ltd (ASX: IAG)
Any company that has the tick of approval from Warren Buffett's Berkshire Hathaway is worth considering.
Insurance Australia Group is the country's leading insurance with many recognisable brands like NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance and WFI. The company showed improving profit margins in its latest profit report and growing premiums.
It's currently trading at 19x FY18's estimated earnings with a grossed-up dividend yield of 6%.
Challenger is Australia's leading annuity-providing company. Annuities turn a retiree's capital into a guaranteed source of income for the term of the annuity, or for life.
It's likely that Challenger will experience continued annuity growth due to the growing retiree population. The number of people over the age of 65 is expected to increase by 75% over the next two decades. The growing superannuation pool should also contribute to bigger annuities.
The government also recently announced in the budget that all superfund trustees will have to offer Comprehensive Income Products for Retirement (CIPRs) that provide individuals with income for life, no matter how long they live. This could benefit Challenger even more over time.
It's currently trading at 18x FY19's estimated earnings with a grossed-up dividend yield of 3.75%.
Foolish takeaway
I believe both of these industry leaders will deliver long-term returns in excess of the ASX index. IAG may offer a bigger yield but I think Challenger could grow substantially over the coming years thanks to the government's new rules and its growing list of annuity products.
