An investment portfolio of dividend-paying UK equities
can provide a steady income.
Many people think that you make money from shares by selling
them when the price goes up. In fact, income from equities in the
form of dividends can provide the lion's share of total returns
from an investment portfolio over time. Since 1950, UK equities
have returned 6.1% per annum, of which almost 4.5% has come from
dividends (Source: Barclays 2012 Equity Gilt Study).
The yield on the UK equity market, as measured by the FTSE
All-Share Index, appears very attractive compared to almost all
other asset classes. The current yield of 4% for the overall market
compares to UK 10-year bonds yielding just over 2% (Source: FT UK
Benchmark 10-year Government Bonds, April 2012), with bank deposit
rates equally low. Looking at the largest ten stocks in the FTSE
100 – often known as blue-chip companies – the
attractions of some equities from a yield perspective seem even
more compelling. For example, the largest stock in the UK equity
market Royal Dutch Shell yields 5.2%, as does GlaxoSmithKline,
while HSBC yields 5% and BP just under 5%.
An investor can build a portfolio – either by buying
individual shares or investing in a unitised vehicle –
and expect to achieve a current running yield in excess of many
other asset classes, such as cash and bonds. Equities also have an
advantage over conventional bonds in that they provide a hedge
against inflation. History shows that over time, dividends more
than match inflation, with all of the above-named stocks expected
to grow their dividends by over the forecast rate of inflation.
Of course, equities are high risk and more volatile than cash or
bonds, but a diversified portfolio of the largest stocks in the
equity market reduces this risk. Because of their yield and the
type of industries they tend to operate in, income shares may be
less volatile than the wider equity market.
Spread the risk
The UK-listed companies that pay respectable yields also tend to
be geographically well diversified. This reduces the risk to the
investor of a recession in one particular market and often gives
exposure to fast-growing emerging markets. Companies are reticent
to cut dividends because of the negative signals it sends to
investors about their long-term prospects, and for the wider
overall equity market, there are few years when dividends are cut
in nominal terms (Source: Barclays 2012 Equity Gilt Study).
In conclusion, a portfolio of high-yielding, blue-chip, UK
equities can offer investors a current running yield higher than
most asset classes, a growing income stream over time and one with
a degree of protection against inflation. Generally, these
companies should provide a lower risk to capital than the overall
equity market, with some exposure to the fastest-growing regions
and countries around the world.
Risk warning: The value of investments can go
down as well as up and investors may not receive back the original
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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