For those of us that want more bang for our buck in the coming year, a self-select ISA focused on stocks that deliver sparkling dividends could be the ideal solution. Shareholder pay-outs from London listed blue chips hit record levels last year and the signs are that dividend growth will continue again in 2012. The trouble of course is that even the most stoic investors in some of the sturdiest FTSE 100 stocks can never be certain of a sure thing. With economic malaise still weighing heavily, those of us with an eye on dividends need to take a more methodical approach to placing our bets.
According to Capita Registrars, which monitors dividend payments by UK listed firms, dividends bounced back to a new record in 2011 and despite economic uncertainty are forecast to rise by 10.6% to £75.0bn in 2012. That means that this year, the prospective gross dividend yield for the FTSE 100 is 4.5%. But can you match or even beat that? And, if you can, how can you heighten your protection from the risk of stocks that may unexpectedly hit hard times and cut their yields to shareholders?
Dogs of the FTSE
Screening the market for the best yields is nothing new when it comes to investment strategies. In the early 1990s Michael O’Higgins and John Downes popularised what is known as “Dogs of the Dow” in their book Beating the Dow. Their technique dumped traditional valuation metrics and focused simply on digging out stalwart income generators and spreading the risk with a 10-strong portfolio of the best yielding shares. At Stockopedia, we have produced a UK version of this approach, which has returned 11.81% over the last three months compared to 3.62% for the FTSE 100. But some might say that this isn’t enough…
With a straightforward yield screen, investors can quickly spot the best dividend payers but that gives no indication of whether a company might be about to reduce payments or shelve them altogether. Indeed, a high yield can be an indicator that the market thinks a dividend may soon be cut.. To counter this problem, one metric to keep an eye on is the dividend cover – or the cushion each company has to pay those dividends without compromising earnings. Another strong filter, particularly given the dramatic and sometimes unexpected effects of tough economic conditions, is…