High Yield Stocks For Investors Looking For Income Options

29th Jan '19 by Ben Hobson

23 comments 10410 reads

UK dividend payouts came within touching distance of £100 billion last year. At a time when many of us were trying to brave out the weak momentum that was pummelling prices across the board, payouts from income stocks actually stayed solid.

Overall, the record £99.8 billion total payout was up by 5.1 percent on 2017, according to Link Asset Services, which tracks UK dividends. That performance was driven by robust earnings growth, some special payouts that beat expectations and the effects of a fall in the value of sterling (which catalysed dividends paid in foreign currencies).

So where were the big dividend stories?

Encouragingly, there was uplift right across the market, with nine of the 10 main industry sectors seeing dividend growth in 2018. But there were some notable cases...

Over the past 18 months it’s been pretty clear that several large mining stocks have been riding a wave of stronger commodity prices. At first, this manifested in some big wins for value investors - with bargain-basement miners rebounding from cyclical lows.

From 2017 onwards, those improving conditions fed through to dividends. There has been bumper payout growth from the likes of BHP, Rio Tinto and Anglo American - which in the past have been some of the biggest dividend payers in the market. And according to the latest stats, mining was the sector that contributed most to dividend payout growth last year.

Banking stocks also did well in 2018. While it didn’t add much to the total, Royal Bank of Scotland finally reinstated a modest 2p payout during the year. It’s quite something to think that back in 2007, shortly before its near-collapse, RBS paid a whacking total dividend of 278.02p.

Another stock offering mixed news last year was British American Tobacco. On the upside, it unleashed a massive dividend hike - up around 97% on 2017 when the fourth and final quarterly payment is made in February this year. But on the downside for BATS shareholders is that the value of the group has broadly halved over the past year, down from £113 billion to £54.5 billion. That dividend hike may well have been welcomed by holders, but will that collapse in value be a longer term cause for concern?.

Looking ahead to 2019, Link is forecasting that dividends (excluding special payouts) will grow by 5.3…

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Umpin

30th Jan '19

My take is to filter stocks from the FTSE 250 yielding more than 5% and with dividend cover of not less than 1.5x, preferably 2x. This should produce an income with less risk. Of those companies, give preference to those with overseas exposure.

Stephen Bland

The article is almost identical in concept to what I've been saying on earlier threads from Ben's previous pieces on this subject where I criticised the major problem on sector concentration in his Dogs strategy creating excessive risk, and my solving this with a diversification filter. I don't mind people using what I've said, it's kind of flattering, but it would be nice if those doing so made a simple acknowledgement of it.

As I've said repeatedly in those other threads, The Dogs is not an income strategy but a capital growth plan using yield as the selection tool. I've been advocating diversification as absolutely vital to ameliorate risk in an income strategy for about 20 years now with my High Yield Portfolios but the same applies to The Dogs.

I've put up several portfolios on those earlier Dogs threads, derived from Stockopedia's rolling one year yields from the FTSE100. Personally though, as I've said, I don't follow it and don't have too much faith in it following a disastrous five year test that I ran on the Motley Fool a long time ago using a five share version, though my idea of enforced sector diversification will likely improve it or at least reduce its risk.

danielbird193

Like the idea and interested in the differing viewpoints above about whether sector diversification reduces overall risk. Surely it would be straightforward to back-test this strategy against the standard (un-diversified) "Dogs of the FTSE" strategy?

Howard Marx

High yield stocks are typically low growth or ex growth.

For the investor seeking a 5% yield, why not invest in a broader Universe of stocks & simply liquidate 5% of the Portfolio each year?

SimonHughes

I agree - definitely look at dividend cover, gearing etc as you say. The second, third or fourth highest yield in the sector may be a better option than the top yield.

Mike888

It's an interesting point Howard,

I have an income portfolio and a trading portfolio and have been challenged by other investors as to why I do it, as every year my trading portfolio outperforms my income portfolio. So you could argue that I'm being somewhat foolish tying up money that could be working harder.

My answer is that trading is hard work and taking dividend income isn't. So I can rest assured (within reason), that if I choose not to trade for a period, or if my trading skills desert me, or if the market turns sour, I will still have an income.

The Dogs is an ancient idea that someone resurrects every few years but I'd guess that not many investors use it. It has to be run for a very long time to prove its worth, an absolute min of five years I'd say, preferably much longer, and almost nobody will be prepared to do that. I've observed that investors who start this mech strategy in a fit of enthusiasm produced by recent good performance will give up as soon as the inevitable bad year hits.

It is self evident that diversification reduces industry-specific risk and that particular risk is the problem with over concentrated portfolios. If you have too much in one industry, then you might do very well or very badly if that industry booms or is hit by problems. Some might actually desire that additional risk dimension but I suspect that the typical investors in the Dogs, who will not tend to be sophisticated players, I think would not want to run that risk.

As for back-testing, it is worthless. People repeatedly fool themselves with it by identifying false patterns that are more the result of chance than successful strategy. As I said, at the Motley Fool we tested it a long time ago in real time, not illusory back testing, over five years and it was rubbish, losing money absolutely and also underperforming the index benchmark.

The reason we chose to try it out, and it wasn't my idea, I just did the monitoring, was precisely due to back tested success from the original book that promoted the idea in the US by Michael O'Higgins, Beating the Dow.

That doesn't mean that it will always be lousy, there's a lot of luck in it so it could be that we just hit a bad patch, but it didn't exactly inspire confidence. Also the MF methodology was flawed I believe by using the virtually extinct FT30 instead of the FTSE100. The reason was that O'Higgins used the Dow30 in the USA as his selection source and it worked there. It possibly has a better chance with the FTSE100, particularly with my added filter of diversification.

Peter Warters

How good to read the comments from Stephen especially as Southbank Research has just pulled his excellent "Dividend Letter" publication based on his HYP principles which I have been following for several years. So Stephen, if I may use this platform to ask you; Have you any plans to independently publish your own new equivalent to the Dividend Letter? If so how can I subscribe to it?

lightningtiger

TSG goes XD tomorrow 8.6% dividend to start with this year. VCT also XD tomorrow giving 5.51%. EVRAS has not got any XD dates this year yet and we cannot guarantee a repeat performance this year yet.

nemo

Simply using high dividend yields for choosing shares seems a pretty superficial and speculative way of investing, investing itself needing a knowledge of the underlying knowledge of companies' business models, strategies and managements. Do too many of us risk our funds, such as they are, far too rashly, particularly in investment market summers careless of the winter's approach?

Hi Johread, It is not just getting the high yield, but trying to get a good company that you are happy with that counts.If you look at the stock report of TSG you will see it is ranked at 95 with increased gold production. The momentum section is all green lights and the dividend yield is showing 14.9% and therefor qualifies for my double digit dividend shares.
Regarding your comment "too risky" , at least the dividend is guaranteed, and in this example the share price is currently rising,which is better than falling.

jjis

31st Jan '19

In terms of longer term performance of this type of strategy, I see another publication has been observing this for some time. They say - "The Dogs are also well ahead over the past 17 years, growing by an average annual 13.7 per cent in total return terms, more than twice the 6.1 per cent total return figure for the FTSE 100 index."

Theirs looks like a fairly simple implementation of it & they also pointed out that it had under performed in 5 out of those 17 years including 2017, but outperformed in the weaker market of 2018.

See these links for full details:

https://www.moneyobserver.com/...

So it seems to work long term, but I would share others reservations on here about diversification and periods of under performance which might make it difficult to stick to. I would also share some of the views expressed about chasing the highest yields & ignoring financials, cover & dividend growth.

Indeed there is evidence to suggest that you would be better focusing on the second quintile of yields as these seem to potentially offer the highest returns with the lowest risk as they may benefit from higher levels of cover, fewer dividend cuts and probably more dividend growth. The same research also suggests that it is better to focus on those yield stocks which can grow their dividends. This evidence does come from the US, but in my experience it applies equally to the UK - see the link below for more details if that is of any interest.

https://www.hartfordfunds.com/...

So personally while I do target yield in my investment as I am aiming to grow my capital and income in real terms over time, I focus on dividend growers & screen as these seem to offer the best combination of risk and reward.

Jamie

https://www.compoundincome.org...

4th Feb '19

Thanks Peter

I am considering various options for a successor to The Dividend Letter but nothing certain at present.

jerseylil

11th Feb '19

I'm not an IT expert but couldn't you perhaps just publish on a website and charge people and annual sub for access? I wouldn't think it would cost that much to set up. I feel a bit lost without the DL! Kindest regards, Val

19th Feb '19

Hello Val and thanks for the appreciative comment.

It's not as simple as just setting up a website. I wish it was as I would have done so by now.

The main problem is the very onerous regulation and compliance requirements regarding the provision of financial advice. It is primarily for this reason that in the past I preferred to work with an existing publisher of financial content that already had the necessary complex, costly and bureaucratic compliance measures in place. It's just too much of a burden to carry alone.

willhampson

Interesting thread, thanks Ben. While my plan is not currently to invest for income, I do like to have some income stocks in my accounts held out of the ISA wrapper. I tend to leave these alone and have found they perform surprising well; in fact, I was quite grateful to them in the sell-off in the last quarter of last year. For what it's worth, I currently like Diversified Gas & Oil (LON:DGOC), Duke Royalty (LON:DUKE) and Somero Enterprises Inc (LON:SOM) and hold all three. I also have a fair chunk of RockRose Energy (LON:RRE) in my non-ISA accounts, which I expect (or perhaps better, hope) will start paying some hefty dividends in the coming years. I do take a different approach in my ISA holdings.

23rd Feb '19

Thanks for the reply Stephen - this is truly dreadful news - yet another example of Big Brother interference. I do hope you find a way round this - I would happily sign any disclaimer and I'm sure many other DL subscribers would too. I guess I shall have to keep Googling you and trawling through years of board comments to see if you say anything new about relevant shares - is there any other way?

Kind regards,

Val

4th Mar '19

Thanks again Val. Unfortunately financial advice can't legally be disclaimed away by the advised to enable the adviser to get round the onerous rules.

As for public comments, I occasionally scribble something on the Lemon Fool HYP forum and similarly here on Stockopedia. I may be posting more here in future but I am a little put off by the lack of interest in equity income investing.

It's not a tremendously popular subject, not sexy and is regarded as dull and pedestrian by probably the majority of share investors. That's the case even though a long term HYP will very likely beat the returns of most short term dabblers. But it's boring for them to consider the very long term because the short term is exciting despite hardly anyone making profits from it over time.

Investing, then doing nothing, is not appealing for many even though it may well be the single most valuable piece of investment advice available. But for short term players the feeling will often be more like:

"Doing nothing?"

"Nothing doing!"

8th Mar '19

Couldn't agree more, Stephen. I still haven't managed to get the gambling mentality out of my kids' heads when it comes to the stock market even though they're not particularly stupid in other respects! And when it comes to 'important' money, they would rather pay a fund manager to do what they could so easily do themselves. Me - I see rip-off's round every corner and do my best to avoid them - possibly too much sometimes. So thank you again, Stephen, for pointing my in the right direction. And thank you for being one of the few people who can write articulately in English!

All the best

Val

Munday

22nd Mar '19

How many stocks wil your hyp contain.

High yield stocks for investors looking for income options

So where were the big dividend stories?

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Ben Hobson

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