Rising equity prices this year have naturally lead to lots of discussion about frothy conditions but it’s worth remembering that the FTSE 100 has put in a relatively modest performance compared to its global peers. For investors in small and mid cap stocks, of course, this really isn’t very important because those indices have soared. But for dividend hunters that prioritise yield over capital growth, the overall health and performance of the market’s very largest companies matters a great deal. In recent months it has become clear that the very highest yielding UK mega-caps have been confined to a very small number of sectors. For dividend hunters wanting to maximise yields and gain broader diversification, European markets could hold the answer.
A tale of two markets
The FTSE 100 has risen in value by around 15.2% over the past 12 months, which has been welcomed by investors who had to put up with a mere 5.8% return during the whole of 2012. But in context that performance is eclipsed by the 28% gain posted by the S&P 500 and even the 27.5% rise seen on the German Dax. To a large extent, the concentrated nature of the FTSE 100 has been its own worst enemy this year. With a few exceptions, the heavily weighted sectors of oil & gas, mining, financials and, recently, utilities, have proved to be a drag.
For income investors, this sector concentration brings its own set of problems when it comes to picking high yield shares. A quick glance at one of the most popular high yield investing strategies - the Forecast Dividend Dogs of the FTSE published on Stockopedia - reveals the dilemma. This strategy buys up the top ten stocks by forecast yield (and then holds them for a year) and overall it has performed well over 12 months, beating the FTSE 100 by 6.7% with a return of 21.7%. The current qualifiers offer a median forecast yield of 5.5% but are highly concentrated, with seven of the ten stocks in the financial and utilities sectors. News in September of Labour leader Ed Miliband’s pledge to freeze gas and electricity prices until 2017 saw shares in three of those utility groups - SSE, United Utilities and Centrica - take a hit. While that may be unlikely to affect dividends in the near term, it shows that even the largest companies aren’t immune…
