The dividend yields on some high quality companies are truly compelling. If you're happy with some risk, these five offer large potential rewards.
Although the market has bounced back over 40% since its March bottom, it is still offering brave investors some compelling opportunities.
As usual, there is a level of risk involved. That's the stock market for you. When you invest in an individual company, you can lose 100% of your money. But there are no limits to the rewards. A share price can appreciate ten-fold or more.
When investing, I am always mindful of Warren Buffett's two golden investing rules…
Rule #1: Don’t lose money
Rule #2: Don't forget rule #1
It's easier said than done of course, and Buffett himself has not been immune to booking massive losses in the great market meltdown of 2008-9. In his 2008 letter to shareholders, he admitted an investment in two Irish banks had fallen by a whopping 89%. He also sold some shares in ConocoPhillips at a loss.
No Investing Guarantees Here
It's a reminder there are no guarantees when it comes to investing in the stock market. If you are after fail-safe investment options, the government currently guarantees £50,000 per depositor per financial institution. Go ahead and open one or more high-interest savings accounts.
You're reading this presumably because you are interested in investing in the stock market. You are presumably prepared to take on a level of risk, with the potential reward being above average returns.
Good.
Now, let me remind you of the various rates of return on offer right now for your money…
- Base rate: 0.5%
- High-interest savings accounts: 2.5%, if you're lucky.
- 10-year gilt yield: 3.75%
- FTSE All-Share dividend yield: 3.4%
Obviously gilts currently offer the greatest returns. Compared to the other options, and remembering your money is safe in government backed gilts, you might be thinking that's the best place to invest your money.
But what if I changed the risk/reward ratio? How about if I ramped the dividend yield up to 5% or more? And how about if I said, over the next five years, there is a decent chance your underlying investment will appreciate in value, perhaps significantly so?
There is still a risk. But there could be significant rewards. Are you brave enough to take the risk?
Truly Compelling Dividend Yields
Right now there are some truly compelling dividend yields on offer for investors brave enough to invest in the stock market. Sure, not all companies will be able to maintain their dividend payments. That's the risk you take, especially when you are chasing very high dividend yields.
I've compiled a list of five companies offering high dividend yields. In general, they are all facing economic headwinds, but then which company isn't?
I've chosen companies with dividend cover of at least 1.75 times and which have manageable levels of debt. Finally, analysts who cover the companies are currently predicting these companies will be able to hold or increase their dividend in the forthcoming financial year.
| Company | Recent price | Forecast dividend yield |
|---|
| Royal Dutch Shell (LSE: RDSB) | 1,685p | 6.4% |
| BAE Systems (LSE: BA) | 323p | 5.3% |
| Cable & Wireless (LSE: CW) | 147p | 6.9% |
| AstraZeneca (LSE: AZN) | 2,755p | 5.3% |
| Tribal Group (LSE: TRB) | 91p | 5.4% |
The Pick Of The Bunch
As I said, there are no guarantees when it comes to investing. BAE Systems is fighting against potential cuts to defence budgets. AstraZeneca is constantly dealing with its products losing their patents. Shell has to deal with an oil price that has fallen from $147 a barrel down to around $70. Cable & Wireless is dealing with mature markets and the recession. Tribal Group is a small consultancy, earning relatively modest profit margins.
The pick of the bunch might just be Cable & Wireless. It already the highest dividend yield of the highlighted companies, but has also engineered a remarkable turnaround, has little debt, and is forecast to raise its dividend even further.
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I wish you happy, profitable, high yield investing.
More on the economy and the markets:
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> This article was first published on 21 May 2009. It has been updated.
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
