High Yield Equity
In a study done on US equity returns spanning 130 years, it was found that income represented a significant proportion of the overall return to shareholders. The annualized compound return from US equities during the period 1872 – 2004 was 9.6%; Dividends accounted for 4.9% of this long-term return.
A study done in the UK spanning 105 years of UK equity returns, reveals a similar pattern. In this study 131.32€ invested in 1899 would have been worth 24,786.61€ in real terms (i.e. after taking account of inflation) by 2004. If we strip out the dividend the real return would have been a mere 223.24€. So it is clear that dividend has been exceptionally important over the long term in overall equity returns.
Let us look at the factors to consider when following a High Yield equity investment strategy.
Many observers believe that dividends are a valuable indicator of a firm’s health and they act as a signal about management’s confidence in future profitability.
It is important when choosing stocks that the level of dividend has not been cut in the last five years or so. This indicates a steady dividend policy which is likely to be maintained by the board of the company in the medium term.
A further filter in choosing stocks for a high yield investment strategy, is to look at the company’s dividend cover. This is the ratio between a company’s earnings and a company’s dividends. A good filter to use is to ensure a company’s dividends are covered by the company’s earnings by at least 1.2 times. In other words the minimum level of dividend cover is 1.2.
A company’s dividend yield is the company’s total annual dividend payments divided by its market capitalisation, or the dividend per share, divided by the price per share. Dividend yields will differ between stock market and sector, the easiest way to choose is pick the top five dividend yield stocks in the main equity markets. Depending on the number of markets this will create a basket of twenty or more stocks. You will notice that many of the stocks that come out of this sort, will include well known global brand companies, which have well established and profitable global businesses.
Beware of stocks with an extremely high dividend yield. This could be caused by a stock price that is extremely low, or by a once off bonus dividend payment made by the company.
Individual investors may wish to create their own direct equity high yield strategy, through their own stockbroker account. Of course the most common way of investing in a high yield strategy is through a high yield equity managed fund, many of which are available to investors.