These 20 mega-cap firms pay a handsome income while you wait for growth.
As a staunch saver and investor, I'm really not fond of today's economic environment.
On one hand, no or low economic growth crimps business profits while, on the other, ultra-low interest rates and stubbornly high inflation keep undermining my cash's future buying power.
The tide is going out
Then again, I haven't felt super-confident as an investor for about two years. However, there have been two occasions in the past 12 months when my trigger finger got very itchy indeed.
The first was during the depths of last year's slump, when the blue-chip FTSE 100 index of elite British businesses crashed to 4,791 on 9 August, marking its 2011 low. Alas, being on holiday at the time, I was unable to take advantage of this obvious buying opportunity.
This week has been the second time that my trigger finger has hovered over the 'Buy' button. However, given the ongoing crises in Greece and Spain, I've decided to keep my powder dry and await further price falls.
Twenty 'yield monsters'
Although I've held fire on increasing my exposure to shares, I do agree with other investors that recent market falls have exposed some deep value, especially among the UK's biggest listed companies.
In fact, for income-seeking investors seeking to play a long game, there are some remarkably attractive blue-chip 'safe havens' out there right now.
To show you what I mean, I conducted a value trawl of the FTSE 100 on Thursday morning. Using a simple filter, I produced a list of 25 companies with market values above £2 billion and dividend yields above 4.5% a year.
I then weeded out five firms with low dividend cover or high earnings ratings to leave a 'top 20' list of dividend giants. Here are these 20 'yield monsters', sorted from highest to lowest dividend yield:
| Name | Value (£bn) | Share price (p) | Earnings rating | Dividend yield (%) | Dividend cover | Beta |
|---|
| Resolution (LSE: RSL) | 2.8 | 198.0 | 4.0 | 9.8% | 2.6 | 1.0 |
| Aviva (LSE: AV) | 8.2 | 271.4 | 16.5 | 9.3% | 0.7 | 1.7 |
| RSA Insurance (LSE: RSA) | 3.6 | 99.6 | 8.4 | 9.1% | 1.3 | 1.0 |
| BAE Systems (LSE: BA) | 8.8 | 274.9 | 6.0 | 6.9% | 2.4 | 1.0 |
| AstraZeneca (LSE: AZN) | 33.4 | 2,636.0 | 5.8 | 6.7% | 2.6 | 0.8 |
| ICAP (LSE: IAP) | 2.2 | 340.2 | 8.4 | 6.5% | 1.8 | 1.3 |
| SSE (LSE: SSE) | 12.6 | 1,330.0 | 11.8 | 6.0% | 1.4 | 0.5 |
| National Grid (LSE: NG) | 23.8 | 668.5 | 13.0 | 5.9% | 1.3 | 0.3 |
| Legal & General (LSE: LGEN) | 6.5 | 109.1 | 8.9 | 5.8% | 1.9 | 1.5 |
| J Sainsbury (LSE: SBRY) | 5.6 | 296.1 | 10.7 | 5.4% | 1.7 | 0.8 |
| Vodafone (LSE: VOD) | 83.0 | 164.8 | 10.0 | 5.3% | 1.9 | 0.5 |
| Royal Dutch Shell (LSE: RDSB) | 128.0 | 2,045.5 | 7.2 | 5.1% | 2.7 | 0.9 |
| Centrica (LSE: CNA) | 16.0 | 308.0 | 12.0 | 5.0% | 1.7 | 0.7 |
| GlaxoSmithKline (LSE: GSK) | 71.6 | 1,425.0 | 12.5 | 4.9% | 1.6 | 0.5 |
| Drax (LSE: DRX) | 2.1 | 570.0 | 10.1 | 4.9% | 2.0 | 0.6 |
| Marks & Spencer (LSE: MKS) | 5.6 | 346.9 | 10.0 | 4.9% | 2.1 | 0.8 |
| HSBC (LSE: HSBA) | 97.0 | 524.1 | 9.3 | 4.8% | 2.2 | 1.2 |
| Tesco (LSE: TSCO) | 25.6 | 315.5 | 8.5 | 4.6% | 2.5 | 0.7 |
| BP (LSE: BP) | 76.0 | 395.3 | 4.7 | 4.6% | 4.7 | 1.0 |
| CRH (LSE: CRH) | 8.0 | 1,076.0 | 7.1 | 4.5% | 3.1 | 1.7 |
| MINIMUM | 2.1 | | 4.0 | 4.5% | 0.7 | 0.3 |
| MAXIMUM | 128.0 | | 16.5 | 9.8% | 4.7 | 1.7 |
Source: Digital Look, morning of 17/05/12
Big businesses mean big dividends
As you can see, these companies' market values range from over £2 billion (Drax) to £128 billion (Royal Dutch Shell), so all are corporate giants.
Also, while their price-to-earnings (P/E) ratios vary from 4.0 to 16.5, the average P/E for the whole portfolio is a mere 9.2. Thus, these are not expensive shares, relative to the post-tax earnings they generate as a whole.
However, the main attraction of these big firms is their high, well-covered dividends. Their dividend yields range from 4.5% at CRH to a whopping 9.8% at Resolution. Overall, the average dividend yield (from investing 1/20th of our pot into each business) is an impressive 6% a year.
What's more, at all firms bar one, these regular cash payouts are well covered by earnings. Dividend cover ranges from 0.7 times at Aviva (expected to rise above 1 this year) to a hefty 4.7 times at BP. Overall, the average dividend cover is more than two times earnings, which is a comfortable cushion.
What's more, this portfolio is less volatile than the UK stock market as a whole. Although individual betas (a measure of price volatility relative to the market) range from a 'dull' 0.3 to a 'racy' 1.7, the overall beta comes in at 0.9. Hence, the volatility of this collection of 20 shares has historically been lower than the London market.
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In comes the income
While this appears to be a powerful portfolio for income, it does have one drawback. It is overly focused on a few market sectors and, therefore, is not terribly well diversified.
For example, it includes:
- Four insurers (Aviva, Legal & General, Resolution and RSA).
- Four power/energy companies (Centrica, Drax, National Grid and SSE).
- Three retailers (J Sainsbury, Marks & Spencer and Tesco).
- Two pharmaceutical firms (AstraZeneca and GlaxoSmithKline).
- Two oil giants (BP and Royal Dutch Shell).
- Two more financial firms (HSBC and ICAP).
- Telecoms Goliath Vodafone.
- Irish cement firm CRH.
- Defence contractor BAE Systems.
Hence, despite being spread across nine sectors, this portfolio has heavy exposure to the financial, energy/power/oil, retailing and drug sectors.
Despite this concentration, you wouldn't need to put a gun to my head to make me buy this portfolio. That's because an investment of £1,000 in each of these 20 businesses would pull in dividend income of £1,200 a year (6% of the £20,000 total). What's more, this income would be tax-free for basic-rate taxpayers, thanks to the notional 10% tax credit attached to dividends.
In summary, this is the kind of approach I intend to take when building my new portfolio. Indeed, with its focus on income and safety first, I reckon that this 20-share family will thrash the wider market over the next decade.
Finally, if you're interested in building wealth from blue-chip shares, then you must download a copy of Top Sectors For 2012, The Motley Fool's latest free guide for intelligent investors. It picks out three sexy sectors to help to boost your investment returns, so grab your copy now!
Cliff owns shares in GlaxoSmithKline. The Motley Fool owns shares in Tesco.
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