It is hard to get too excited about the FTSE 100 just now. During my research for this week’s cover story on the health of blue chip dividends, it occurred to me that there are only a limited number of stocks in the FTSE 100 in which I would personally invest at present. Some of my colleagues might disagree, which is why you will see plenty of positive stories on FTSE 100 stocks in the magazine. Perhaps I am more cautious than most.

Nearly every stock either operates in an industry with depressed or uncertain market conditions, earnings growth is grinding to a halt or there are never-ending regulatory issues. If I’m going to risk my money, I want superior rewards.

Many investors flock to the FTSE 100 because they assume these companies are too big to fail. Indeed, a six-monthly trip to the dentist the other day resulted in a conversation about the blue chips. My dentist had previously been burnt investing in an AIM miner that went bust, so he now says he will stick to the FTSE 100 because he assumed they are bigger, more robust names. This is a classic mistake which many investors will have made and may now be regretting.

No return

The FTSE 100 index has actually been a poor performer this year. Investors would have lost money through buying a tracker fund as the total return is a mere 0.0379%, which would have been wiped out by fees.

In comparison, the FTSE 250 index total return year-to-date is a much healthier 9.65%. There is much to like about mid cap stocks. Contract wins, positive trading updates and earnings upgrades are more likely to act as major share price catalysts for FTSE 250 firms than similar events at FTSE 100 stocks. Dividends among mid cap stocks have the potential to grow at a faster rate than blue chip peers. It is arguably easier to understand the full workings of a mid-cap company than the giant corporates who may have hundreds of divisions and operations around the world.

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As an index, it is often stated that the FTSE 100 is really governed by natural resource companies. This argument is no longer credible. Oil, gas and miners now only represent 17.3% of the total index, down from 31% three years earlier.

That looks like it could fall even further with Randgold Resources (RRS) on the cusp of losing its place in the blue chip index and big problems facing BHP Billiton (BLT) in the wake of a tailings dam spill at its 50%-owned Samarco iron ore mine in Brazil. The latter could result in significant environmental clean-up and legal costs, together with lost cash flow, all likely to weigh on the company’s share price and market valuation.

Investment bank Jefferies believes the operation - accounting for 3% of BHP’s forecast earnings - could be closed for a long time, perhaps years. ‘BHP and Vale (the other joint owner of Samarco) are good operators who consider safety to be a top priority. Tailings dams do fail some times, and accidents can happen even for those miners that take safety the most seriously. A disaster of this magnitude, however, is likely to have a long-term negative impact on the reputations of these two companies,’ it adds.

List of issues

Looking at the list of FTSE 100 stocks, ranked by market cap from big to small, every sector seems to have issues that warrant investors receiving extra rewards to compensate for the risks of putting money into this area of the market. Here are a few examples.

• Oil, gas and mining stocks: Commodity prices unlikely to stage major rebound soon. Inadequate free cash flow puts question mark over sustainability of most of the relevant FTSE 100 constituent’s dividends. The stocks look expensive on a price to earnings (PE) basis.

• Pharmaceuticals: Concerns about potential US market drug price cap takes the shine off the sector. Investor sentiment is poor at present with high probability of profit taking in the sector following a big rally over the past few years.

• Housebuilders: Shares are coming under pressure after a multi-year rally. Analysts believe margins could start to be squeezed if construction costs go up and house prices fall down.

• Banks: Dogged by fines and regulatory pressures for many years, these trends are still intact but banks look like they could be turning a corner. PE ratios look reasonable, so banks are one of the more interesting parts of the FTSE 100 for investors. Nevertheless, it would be nice to have greater dividends from the sector.