The Press and Journal (Inverness, Highlands, and Islands)
Rewards of high-yielding equities
Yield assets remain to the fore as investors seek incometo compensate for low returns from cash savings.
One option for yield seekers is corporate bonds. Government debt, the leading alternative fixed-income investment, is at multi-century lows and it is therefore no wonder that yield- hungry investors have poured into corporate bonds ( company debt). This has led to fears of a bond bubble.
However, concerns over the eurozone sovereign debt crisis, the upcoming US “fiscal cliff” and a hard landing in China are reasons for keeping interest rates artificially low in the medium term, and so the bubble may not burst just yet.
Inflation may erode returns from corporate bonds and this is one reason why many investors have opted for high-yielding equities. Defensive companies – such as utilities, consumer staples, and pharmaceuticals – are often able to pass higher costs which they themselves bear on to their consumers which will be reflected in company earnings and the ability to pay dividends.
Companies with high and rising dividend yields are attractive as the dividend payments can keep up with, or even exceed, inflation. Their shares have thus been well supported – many provide consistent dividend growth and now command a premium.
Total dividendpayouts in the UK have broken records, rising 21.3% in the first half of this year, according to Capita Registrars. In some cases dividend yields are higher than corresponding corporate bond yields. For example, Royal Dutch Shell ordinary shares pay a dividend yield of 4.6% while its five-year bond yield is only 1.19%.
There are risks attached to both asset classes. If the global economy goes into reverse, corporatebondsare likely to outperform highyielding equities. Conversely, if markets remain range-bound or break out on the upside, high-yielding equities with dividends rising above the rate of inflation should continue to outperform corporate bonds.
Emma Plumpton is an investment manager with the Grampian branch of stockbroker RedmayneBentley and can be contacted on 01466 799444