There are some amazingly high dividend yields on offer these days, most notably from some of the largest blue-chip shares in the market.
The question, as always, is whether or not those massive yields are sustainable.
Take GlaxoSmithKline as an example.
It is one of the world’s leading pharmaceutical companies, it has a market cap of £68 billion and its record of increasing or at least holding the dividend goes back into the last century.
And yet this keystone of many a portfolio (including a certain Mr Neil Woodford) is available to buy with a dividend yield approaching 6%.
That’s an income of 6% from a company where the dividend has grown by almost 6% a year over the past decade and more.
So why is Glaxo available with such a high dividend yield when other blue-chip dividend growth stocks, like beverage giant SABMiller, can only manage a paltry 1.7% yield?
The answer, of course, is that the market expects Glaxo’s dividend to be cut and SABMiller’s to continue to grow rapidly for many years.
But the gap between Glaxo’s and SABMiller’s yields is so large it looks as if the market doesn’t just expect Glaxo to cut and SABMiller to grow, it is virtually certain; as if no alternative outcome were even possible.
Such unerring certainty is unusual, and I think that perhaps some other factor is at play.
What we might be seeing, rather than an excess of crystal ball-gazing certainty, is a split in the market.
The split is between those investors whose primary focus is on predictable earnings and dividend growth and those for whom such growth is a secondary or even irrelevant factor.
Tony Yarris of Wise Investments summed up this market bifurcation nicely in a recent article.
His position is that the financial crisis made investors more cautions, and as a result many of them homed in on predictable growth companies.
These companies tend to provide repeat-purchase products or services like household consumables (e.g. beer in the case of SABMiller) or subscription software from companies like Sage (which I reviewed recently for BullBearings.co.uk).
Companies in that predictable sweet spot have seen their valuations explode upwards. SABMiller for example has gone from about 1,000p pre-2009 crisis to 4,000p today.
On the other hand Yarris suggests that dividends, for whatever reason, have fallen out of favour.
For the predicable growth companies, dividend yields are tiny, but that doesn’t matter because their growth is predictable and that’s all that matters (according to this world-view).
Companies…
