Good old-fashioned dividends are coming back into vogue. Nearly three years after previously soaring stocks came crashing down, investors are starting to show more interest in getting a steady income stream from equity investments.
Merrill Lynch Investment Managers is one fund manager that is making a push for high-yielding stocks, rejecting the idea that they are lower-growth investments simply because income is gained at the expense of capital growth
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Michael Jones, head of UK third-party retail at MLIM, explains: “In the late 1990s, people weren’t worried about dividends and were just chasing the stock price [gains].” He adds: “For example, if capital gain was 20% every year with a 2% to 3% yield then dividends were a secondary concern. Now, if capital gain is 5% to 6% and yield is 3% to 4% the dividend has more value.”
To illustrate how high-yield stocks in the UK, on average, deliver higher growth than low-yield shares, MLIM compares FTSE 350 high-yield performance and low-yield indices between January 1986 and August 2002.
The average annual dividend yield on stocks in the high-yield index was 4.8% with price growth in the index of 8.6%, while the low dividend stocks yielded an average 2.5% with a rise in share price of only 4.7%.
The performance of the high-yield index and the return of focus on dividends indicate that high dividend-yielding equity funds such as MLIM’s UK Income Fund are likely to become more attractive. In addition, Jones says: “Over the very long term investors in UK stocks should expect to see a third from dividend yield and two-thirds from appreciation of the share price.”
Figures recently published by the Investment Management Association show that there was just over £19.2 million invested in UK Equity Income Funds in October, up from £18.4 million in September, making it one of the biggest selling sectors.
As of November 1, MLIM’s UK Income Fund had a net yield of 3.6%. The net dividend on the fund has increased each year since it was launched in 1984. The largest increases in income per unit of the fund over the past 10 years occurred from 1994 to 1995 and again to 1996. The rise in income per unit then dipped from 1996 to 1999 and rose again in 2000.
In 2001, however, the increase in income per unit of the MLIM fund slipped from an increase in 2000 of 0.8p to a 0.1p increase in 2001. Jones says the relative increase has come down more recently because companies are buying back shares instead of increasing dividends. Of course, there will always be the danger that a corporate will cut its dividend.
