Thirty years ago this month stockmarkets crashed around the world. A dramatic surge in prices ended in sudden collapse on 19 October 1987, or Black Monday as it became known. While few are predicting that anything similar will happen this year, there are areas of both creeping concern and big attraction in the market.
With interest rates at 0.5% and lower since 2009, monetary policy has herded yield -hungry investors into the stockmarket. ‘Risky’ assets like shares have become popular because decent returns are hard to find anywhere else.
As a result of all this, index valuations have risen. Some of the biggest beneficiaries have been smaller, growth-orientated shares. These are precisely the kind of stocks that do well in calm, settled, confident conditions.
But if markets become unsettled, it’s these smaller more speculative shares that will be hit first – and it’s likely they’ll be hit hardest, too. And while any change in fortune may be some way off, it’s worth remembering that there are other ways to profit from the market – and one of them is with larger-cap dividend stocks.
Dividend payouts break records
While holders of many fast-growing companies have done well recently, income investors have been rather pleased with themselves, too. That’s because a big chunk of payouts are either made in dollars and euros, or are paid by companies that make large profits in those currencies. With the pound falling in value after the EU referendum, those dividend payouts were worth a great deal more to UK investors.
But this exchange rate effect couldn’t last. The elephant in the dividend room was that after 12 months of supercharged growth caused by weak sterling, the effect would evaporate. Year-on -year comparisons wouldn’t pick it up anymore because the rates have been stable for so long. And that’s exactly what we’ve seen in the latest payout figures for the third quarter – exchange rates made hardly any difference.
All this might lead you to assume that dividends are now likely to drift. But that’s not the case at all – dividend payouts have actually smashed records over the autumn.
According to Capita Asset Services, payouts hit £28.5 billion in the third quarter, up 14.3% on the same period last year. That makes it the best Q3 on record. When you strip away the impact of companies paying ‘special’ dividends, growth was still a mightily impressive 13.2%.
And when you remove the negligible impact of exchange rate effects, dividend growth of 12.9% was the fastest we’ve seen in payouts in any quarter since 2012.
So, for investors captivated by the smashing gains of smaller, high growth shares, but concerned about the potential volatility, there are other options. High yields in large, stable, blue-chip companies can be both highly rewarding and reliable.
This week’s screen captures the high yield “Dividend Dogs” approach, but focuses on the forecast yields for next year.
Name Mkt Cap £m PE Ratio Forecast Yield % Forecast Dividend Cover Stock Rank Sector Direct Line Insurance 5,121 15.7 7.4 1.1 83 Financials Centrica 9,637 12.4 7.2 1.3 50 Utilities Taylor Wimpey 6,737 10.4 7.2 1.4 99 Cyclicals SSE 14,137 9.26 6.9 1.3 80 Utilities Lloyds Banking 48,553 20.8 6.5 1.7 62 Financials Vodafone 58,151 – 6.1 0.6 86 Telecoms BT 27,031 9.44 6 1.7 72 Telecoms BP 98,292 22.5 6 0.9 82 Energy Legal & General 15,989 10.4 6 1.5 94 Financials Imperial Brands 29,879 22.7 5.9 1.5 45 Defensives
A glance at the price-to-earnings (PE) ratios of these companies suggests that a number simply aren’t on the heady multiples that you can easily see elsewhere in the market. That could suggest a general ‘coolness’ towards these sorts of larger stocks, where rapid price re-ratings tend to be less likely (but the stable yields may make up for it).
All the classic popular dividend payers are here – ranging from stalwarts like BP (BP.), Imperial Brands (IMB) and Legal & General (LGEN) to the likes of Direct Line insurance (DLG) and Lloyds Banking (LLOY). Against Stockopedia’s own ranking of each stock’s quality, value and momentum – with StockRanks from zero (poor) to 100 (excellent) – many of these shares score pretty well.
So, on the anniversary of the ’87 crash, those investors who feel a sense of foreboding about stretched valuations and patches of euphoria in the market, could take heart from more reasonably priced, but less exciting dividend stocks. The most recent figures suggest that payouts are set to grow further this year, with an overall prospective yield of 3.7%. But by digging around among some of the slightly unloved blue-chips, it’s possible to find much better forecast yields than that.
Interactive Investor’s Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard’s review of Stockopedia.com and learn more about the site.
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It’s worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.
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About the Author
Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including “How to Make Money in Value Stocks” and “The Smart Money Playbook”
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.