DIY Investor Magazine
/
Jan 2017
20
INVESTING FOR INCOME IN A
LOW INTEREST RATE AGE
Mark Riding, Founder and Chairman,
explains how DividendMax can help equity investors find dividends
UK interest rates are currently at an all time low of
just 0.25%. Some say that they could fall to zero.
UK government securities are also providing record
low yields and property is set to stagnate if market
commentators are to be believed. Savings rates are very
low.
Yet, nobody wants their savings to offer a near zero
income. Since Brexit, we have seen the stock market
hit 14 month highs and one of the principle reasons for
this has been the search for yield, allied to the fact that
many UK companies do a lot of business overseas and
the pound fell sharply after the Brexit vote.
The UK stock market has been in a long term bear
market now since 2000 and conditions look set for this
to change. The yield gap between fixed income and
equities is very high and must close. This will lead to
higher prices for equities over the medium term, which
we would define as 1 to 5 years.
The timing of purchases for high yielding equities is
important and we at DividendMax look to the next three
dividends to cement that yield. Because of the nature
of UK dividend payments, which in many cases reveal
a dividend pattern of Interim / Final, there are good
opportunities to get the timing right.
Dividends are often paid on a 1/3 (interim) to 2/3 (final)
basis so it is advantageous to look to time equity
purchases to take advantage of that pattern.
This means attempting to buy with a view of up to
eighteen months where the dividend pattern is final /
interim / final.
The closer to the first final dividend that you can get
without a material rise in the price, the higher the yield
will be over the period in question.
All investors want to ensure that their capital is
preserved, so what do we look for in a company that
gives the equities investor the best chance of achieving
this?
The primary factor is growth in the dividend backed by:
•
Strong free cash flow
•
High dividend cover
•
A good dividend track record
The equities investor should always take a portfolio
approach with a diverse sector bias. This means that the
investor should not put all of his/her eggs in one basket.
The portfolio should consist of at least 10 companies, all
from different sectors. The more companies and sectors
that the portfolio contains, the greater the divergence
and therefore the lower the risk.
The golden rule for investors as far as we are concerned
is never buy a company that does not pay a dividend.
Additionally, If a company reduces or has to completely
cut the dividend, this is a serious alarm bell and is one
that companies do not recover from very quickly in most
cases. (witness Tesco)
The lion’s share of all returns from the UK stock
market over time has come from dividends. There are
investments obviously that can yield tremendous returns
without dividends, Apple inc. for instance, but these are
thin on the ground.
THE YIELD GAP BETWEEN FIXED INCOME AND
EQUITIES IS VERY HIGH AND MUST CLOSE’
‘THE COMING YEARS REMAIN ATTRACTIVE FOR
EQUITY INVESTORS
