SOME readers may be wondering about income stocks in these volatile market times. There are a number of risks dotting the investment landscape, ranging from the ongoing Euro area sovereign debt crisis, to concern over a political stalemate in the US on raising the debt ceiling, to resurfacing worries about a slowdown in global growth, or geopolitical tensions and commodity price volatility.
All of these could remain key downside risks for investors. But we believe that income stocks continue to offer a number of opportunities and are likely to remain popular with investors, especially as the economic outlook is still somewhat clouded.
The current appeal of higher yielding equities is easy to understand: a significant number of companies are now yielding more than the relevant benchmark 10-year Government bond.
More interestingly, a significant number of firms have a dividend yield that is higher than they are paying on their own debt. This gives some indication of the valuation attraction of equities as a whole but, more specifically, of high-yielding equities, in our view.
On top of this, at this stage of the cycle, the companies with higher payout ratios relative to the rest of the market tend to come from the less cyclical, more defensive sectors with relatively secure cash flows, such as utilities, telecommunications, and healthcare.
These are sectors that tend to allow investors to opt out of any significant macro-economic bets – a trait that may continue to be popular for the next couple of quarters.
Even when one removes the need for such stalwart qualities, higher-yielding stocks in their own right look to be a sound way to gain exposure to the equity market.
High-yield equity indices, both in Europe and the US, have tended to outperform their respective benchmark indices and provided investors with better risk-adjusted returns over the last 10 years. An example of this is the S&P 500 Dividend aristocrats index, which has managed an annualised return of 8.1% over the last decade against the S&P (having mustered only a lowly 2.8%).
With all this in mind, we believe that there are a number of income stock opportunities for investors, largely due to their strong fundamentals and by merit of their superior dividend yields.
These stocks are then further screened for their ability to keep paying and growing their dividend, with names in the healthcare and utilities sectors, as well as in telecommunications and financials, among others.
This should give investors the opportunity to invest in stocks where there is reasonable capital upside potential, as well as an attractive dividend yield.
We believe that income stocks which offer attractive yields should be considered a core part of any equity portfolio that is seeking a decent and growing income yield.
As we have noted before, we think that equity markets are going to be torn between the bulls and the bears until confirmation (or not) that this current “soft patch” in global economic data is just a mid-cycle pause for breath.
In the meantime, we believe that tilting an equity portfolio towards stocks with a decent yield is one way for investors to shelter from some of the potential volatility that lies ahead.
Investing in shares is not for everyone. Their value can fall and you could get back less than you invest. If you are unsure, you should seek independent advice.
:: Andrew Miller is regional office head of Barclays Wealth in Newcastle
