Investing for High Yield

During the recent world-wide stock-market rallies (March to November 2009) the shares in good reliable safe large companies got left behind. Much of the initial growth in the markets was a "Dash for Trash": people bought stocks that had been hit hard by the Credit Crunch and made huge returns as the prices recovered, despite many of these companies cutting their dividends completely and in some case being barely solvent. The big safe blue-chip companies however paid out good safe dividends, but grew at a far more pedestrian rate. This left many apparent bargains: UK companies such as Vodaphone (VOD), Unilever (UNLVR), Sainsbury (SBRY) and Glaxo all paid dividends far in excess of the bank base rate.

It is important to check the safety of a dividend before investing, by checking the dividend cover, dividend yield and PE ratio. To see how to assess the value of a company and the safety of it's dividend: See this article...

While these shares cannot be immune to any future downturn they are less likely to fall back as far and probably will keep paying out the big dividends.

If you don't have the time or confidence to pick individual stocks or want to just spread a small amount of money across the market then managed funds are the answer and there are many that specialise in Value or Income investing. Warren Buffett is perhaps the most famous Value investor in the world, but in the UK the most famous for Income investing is Neil Woodford who manages high income equity funds for Invesco Perpetual and the Edinburgh Investment Trust. His performance over the recent rally may have seemed poor, but that is because he invested in safe companies that may have been left behind, but still represent great value. Putting your money into a managed fund reduces the risk compared to individual shares and avoids the broker commission, but the initial and annual management charges soon add up if you are investing a larger sum.

Fundamental analysis is the favoured tool for Value and Income investment, but analysing hundreds of shares to find out which is the best value is very time-consuming. There are screening tools available from various web-sites (e.g. the Financial Times or Investors Chronicle) that allow you to list all shares that meet various criteria such as PE, yield and dividend cover, but for a quick overview of the top-ten favourites have a look at the top-fundmangers, such as Neil Woodford (e.g. have look at the Edinburgh Investment Trust annual report for the top ten equities to see what he favours) and compare with other similar funds. Neil Woodford actually prefers Pharmaceutical shares (e.g. Glaxo and Astra) to oil giants (BP and Shell which also pay large dividends, but he believes may cut dividends in 2010) other fund managers disagree. This is however just a starting point and only represents a snapshot of part of the portfolio (the managers may have more complex trading and hedging reasons for owning some of the components of the portfolio)

The Top Ten Holdings of Edinburgh Investment Trust (at time of writing: 28 November 2009)

BP 8.50%
Royal Dutch Shell 7.90%
HSBC Holdings 6.00%
Vodafone Group 5.80%
AstraZeneca 3.70%
Imperial Tobacco Group 3.50%
National Grid 3.40%
British American Tobacco 3.30%
Anglo American 3.00%
BG Group 2.80%