A bigger pool

5th October 2011 by The Value Perspective

By Nick Kirrage.

Much attention is being directed towards how the UK market currently yields more than gilts – the bonds issued by the UK government – but let’s approach the subject from a different angle. Rather than taking the yield of the UK market as a whole, the following chart shows the number of FTSE 100 companies that now yield more than gilts.

The reason we feel this is more interesting is the average UK market dividend is skewed by a handful of enormous stocks: more than half the dividend income generated by the UK market comes from just 10 companies, while a little under 70% comes from 20 companies. With some 700 listed companies in the UK, however, an overall market yield above gilts is not so much an indication of an increased opportunity for income investors as it is a reflection of the valuation of the country’s very largest companies.

But this chart shows income investors in the UK need no longer simply own the likes of Royal Dutch Shell, HSBC, Vodafone, GlaxoSmithKline and other Footsie titans – there are currently plenty of yield opportunities elsewhere and each could be a 1% or 2% position in a portfolio. In other words, their opportunity set would appear to have increased quite substantially. In fact, we would even argue this chart underestimates that opportunity set because there are a number of natural, high-yielding type businesses not currently paying a dividend.

In The income irony, we noted the 2008 recession was so harsh that, rather than maintaining their dividends as a show of strength, many businesses decided to cut their payouts and concentrate on looking after their balance sheets. As a result, a lot of companies that through other recessions would have held their dividend – and thus become attractive high-yield stocks – today have no yield.

Whereas, 18 months ago, income seekers had a fairly limited number of chances to generate a yield from equities – and they may not have been all that comfortable with the stocks they had to hold in order to generate an income – now, on a relative basis, there are many more interesting opportunities out there.

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2 thoughts on “A bigger pool”

  1. Anonymous says:

    OK so where does one go if you are a pensioner living on fixed income.    I’m not sure I read your article correctly; I can’t glean where one would even begin looking.    For my own part I left the UK completely to look elsewhere for investment.

    1. Anonymous says:

      Comment on behalf of Nick Kirrage:
      Hi mcgrathr20,
      Thanks for your comment, glad that it got you thinking.
      In the piece I was reviewing the opportunities for income, or rather dividend yield, in the UK stockmarket as I see it today. I’m one third of The Value Perspective Team, who is dedicated to looking for companies in the UK stockmarket that are valued at less than their true worth and waiting for a correction (and therefore a good return over the long-term). So our expertise is very much in this particular area of the UK stockmarket and whilst I’m not an expert on all asset classes or your particular situation, from your comment it sounds like you live outside the UK. Perhaps it’s a good time to review your overall investment strategy with your financial advisor. And if you don’t have one and live in the UK http://www.unbiased.co.uk is a good resource to find one near where you live.

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