AS we are now well-entrenched in the season of spending, it is probably relevant for most people to consider incomes.
It's been getting increasingly difficult to generate income from savings.Bank deposits hardly pay anything and with the base rate at a meagre 0.5 per cent - and the signs from the US for an interest rate rise in the near future not at all clear – this seems unlikely to change significantly any time soon.
Equities do yield more, but this comes at the price of greater risk. The UK equity market has a yield on the All-Share Index of 3.6 per cent.
However, among the larger companies there are some which display yields which previously would have been more readily associated with “basket cases” – companies in decline which are expected to cut their dividend as it is unsustainably high in the market’s opinion.
This is no longer the dominion of small somewhat obscure stocks. That stalwart of the FTSE 100, Royal Dutch Shell is currently yielding 7.2 per cent. There are now question marks over a number of high yielding blue chip stocks, BP (6.7 per cent), BHP Billiton (10.2 per cent), Rio Tinto (6.7 per cent) and Glaxosmithkline (6.5 per cent) to name but a few.
We have already seen a plethora of dividend cuts as Tesco, Serco, Glencore, Drax, Centrica, Standard Chartered and Amec have all succumbed.
The income from large companies’ dividends is falling and the level of cover – the proportion that dividends are covered by earnings – has fallen from 2.7 times to 1.6 times. These are worrying times indeed for income-seekers. We now appear to be at the stage in the economy when growth is harder to come by and earnings growth in particular. Thus dividend growth is also harder to find.
For those willing and able to bear a slightly higher level of investment risk, it might be worth considering one area where there is still scope for dividend growth: the smaller end of the market.
This does, of course, bring with it a whole raft of different risk considerations, but with scope for higher growth and therefore earnings, there is the possibility of growing dividend streams; there is some evidence that smaller companies have shown themselves increasingly willing to consider increasing their dividends.
Smaller companies are clearly not for everyone, but with a growing number of smaller company funds specialising in income, this is an area now accessible to a wider audience.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
