Investing for yield

Tuesday, Sep 15 2009 by

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…

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Telecom Plus PLC is engaged in providing landline telephony (calls and line rental), broadband, mobile, gas, electricity and CashBack card services. The Company's segments include Customer Acquisition and Customer Management. The Customer Acquisition segment includes the sale of marketing materials, and sale of equipment, such as mobile phone handsets and wireless Internet routers. The Customer Management segment is involved in the supply of fixed telephony, mobile telephony, gas, electricity and Internet services to residential and small business customers. CashBack card allows its members to earn cash back on shopping and bill payments. Its subsidiaries include Telecommunications Management Limited, which supplies fixed wire and mobile telecommunication services to business and public sector customers, and Electricity Plus Supply Limited and Gas Plus Supply Limited, which hold the licenses for the supply of energy services to residential and business customers in the United Kingdom. more »

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Punch Taverns Limited, Formerly Punch Taverns plc, is a United Kingdom-based pub company. The Company is engaged in the operation of public houses under the leased and tenanted model, which involves the granting of leases to tenants operating the pub as their own business, paying rent to the Company, and purchasing beer and other drinks from the Company. The Company's segments include Core and Mercury. It has a portfolio of approximately 2,580 pubs in the Core division and over 690 pubs in the Mercury division. The Company also operates public houses under the retail operating model. The Company has approximately 110 pubs trading under retail contracts. The Company's pub categories include Community Pubs, High Street Pubs and Destination Pubs. Its pubs include Arkwrights, Black Horse, Coach and Horses, Bulls Head, Cedar Inn, Cross Keys, Castle Inn, Saracens Head, Stanley Arms, Travellers Inn, Travellers Rest, Bronte and Blacksmiths Arms, among others. more »

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BT Group plc is a communications services company. The Company is engaged in selling fixed-voice services, broadband, mobile and television products and services, as well as various communications services ranging from phone and broadband to managed networked information technology (IT) solutions and cyber security protection. The Company operates in four segments: Global Services, Enterprise, Consumer and Openreach. Its Global Services is engaged in providing managed networked IT services. Its Enterprise provides communications and IT services in the United Kingdom and the Republic of Ireland (RoI). The Consumer segment is a provider of fixed-voice and broadband services in the United Kingdom. Openreach provides services, such as copper and fiber connections between its exchanges, and homes and businesses. more »

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About valueinvestor


I spent fifteen years working in the City as an analyst - now, I spend my time looking after my own portfolio and working as a writer.  I reckon I've probably looked at more than a thousand annual reports in varying degrees of detail over the years and I've noticed that useful information is often in inverse proportion to the size of the report! Very much a believer in value investing. more »

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