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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