With interest rates at just 0.5%, investors are looking for more profitable things to do with their funds than keep them in cash. While corporate bonds have been a popular destination for investment, equities look undervalued from a yield perspective - and offer the prospective of increasing returns over the medium term.
For the past fifty years, equities have generally yielded less than bonds. They're not as safe, since dividends can be varied at the will of management - unlike interest paid on bonds - but since the companies are expected to grow, investors get a dividend that should grow over time, giving them a hedge against inflation.
Up till now the only time that the yield gap reversed, with equities yielding more than bonds, was 2003 - and the reversal acted as a clear 'buy' signal.
The ten year gilt yield is now 3.65%, not far off its record low of 3% reached earlier this year, while the yield on the FTSE All-Share index is 3.8%. Not as cut and dried as it was earlier this year, but still suggesting equities are undervalued.
Defensive stocks such as the utility companies are an obvious place to look for dividends. Reputed fund manager Neil Woodford, of Invesco Perpetual, believes these are the best investments this summer - his funds are defensively positioned in pharmaceuticals, tobacco and utilities, which have “resilient business models” and which he believes are undervalued.
Utilities have underperformed since the start of the bull rally as investors have looked for stocks better geared to recovery. Some offer excellent yields - Scottish & Southern Energy for instance sits on a 5.7% historic yield, United Utilities offers 6.8%, and National Grid 5.8%. Cash flow is strong, and most are expected to increase their dividends this year. However, it's worth remembering that most of the utilities are at the mercy of government regulation - which could dilute their returns to shareholders if the pricing regime toughens.
Telecoms stocks have some of the same characteristics, though BT Group spoilt the sector's image with its exceptional writedowns on its global services IT business, which forced a huge cut in dividend. The market has priced that in - BT Group offers a yield of over 5%, and £VOD nearly 6%.
It's worth looking down the list for some lesser known bargains - Telecom Plus yields 5.8%, though the…
