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Insight: investing

Small investors have some clear favourites when it comes to playing the stockmarket.

They like household names such as Telstra, BHP Billiton and, of course, the big banks.

Unfortunately, though, the most popular blue-chip stocks have performed pretty poorly over the past year.

Telstra, which has the largest number of retail shareholders, has spectacularly bucked this trend, thanks in part to its multibillion-dollar agreement to shut down its network to make way for the National Broadband Network. The insurance company IAG has also performed solidly.

But none of the other top stocks have posted meaningful capital gains and many have lost value.

Investors in BHP Billiton and AMP have seen their assets fall by more than 20 per cent.


For all the bad news on share prices, however, dividends have remained solid.

If you compare today's price with historic dividends - known as the dividend yield - many blue-chip stocks start to look more attractive.

Bank stocks, for instance, have a dividend yield of 8 per cent to 10 per cent - much more than returns on term deposits.

But before being seduced by the lure of high dividends, many analysts urge people to think twice.

After all, share prices have fallen for a reason.

While today's prices might look attractive compared with past dividends, in many cases the markets aren't expecting the past performance to continue. This is especially true in some of the most popular sectors.

For financial sector stocks, which make up six of the top 10, profit growth is expected to slow because households and businesses just aren't borrowing as they used to.

With house prices in the doldrums, the annual rate of credit growth by owner-occupiers has slumped to its slowest pace since 1991.

Mining companies, which are heavily exposed to global conditions, are no longer receiving the free kick to profits from rising resource prices.

China's growth has slowed to a (still rapid) pace of about 8 per cent, and the race to dig up more minerals around the world has increased global supplies of key commodities.

Most agree resource prices have now peaked.

For these reasons, it's important to put the attraction of high yields into perspective.