And with gilt yields rising, today's market does not look cheap.
Checked your tracker dividends recently? You may be surprised.
The following table suggests the payout growth from the FTSE All-Share index has ground to a halt in the last twelve months:
| Date | All-Share
index | All-Share
yield (%) | 'Dividend
points' |
|---|
| 13 July 1998 | 2,798 | 2.36 | 66 |
| 13 July 1999 | 3,012 | 2.21 | 67 |
| 13 July 2000 | 3,099 | 2.11 | 65 |
| 13 July 2001 | 2,674 | 2.47 | 66 |
| 13 July 2002 | 2,059 | 3.29 | 68 |
| 13 July 2003 | 1,992 | 3.40 | 68 |
| 13 July 2004 | 2,175 | 3.24 | 70 |
| 13 July 2005 | 2,625 | 3.03 | 80 |
| 13 July 2006 | 2,928 | 3.16 | 93 |
| 13 July 2007 | 3,468 | 2.70 | 94 |
During 2005 and 2006, I told you how FTSE dividends were expanding at a double-digit pace. But the 'dividend points' currently available from the All-Share (i.e. the index value multiplied by its yield) remain at the same level seen this time last year.
I presume the weakening of the dollar may be responsible for the slowdown. For example, I calculate the sterling payouts from index heavyweights BP
(LSE: BP.)
and HSBC
(LSE: HSBA)
have grown by 1% and 2% respectively during the last twelve months.
Whatever the cause, the lack of dividend growth is not great news for tracker holders -- especially as the income from gilts has increased sharply of late.
This next table compares the yield available from the All-Share index to that from 10-year government bonds:
| Date | All-Share
yield (%) | 10-yr gilt
yield (%) | 'Yield gap'
(%) |
|---|
| 13 July 1998 | 2.36 | 5.83 | 3.47 |
| 13 July 1999 | 2.21 | 5.16 | 2.95 |
| 13 July 2000 | 2.11 | 5.16 | 3.05 |
| 13 July 2001 | 2.47 | 5.15 | 2.68 |
| 13 July 2002 | 3.29 | 4.93 | 1.64 |
| 13 July 2003 | 3.40 | 4.22 | 0.82 |
| 13 July 2004 | 3.24 | 5.11 | 1.87 |
| 13 July 2005 | 3.03 | 4.32 | 1.29 |
| 13 July 2006 | 3.16 | 4.64 | 1.48 |
| 13 July 2007 | 2.70 | 5.49 | 2.79 |
At the end of last week, gilts provided 2.79 percentage points more income than the All-Share index. That's the highest premium for six years, since when the All-Share index has grown by just 4% per annum. Between 2002 and 2006 -- when the 'yield gap' was less than 2% -- I calculate subsequent annual returns from the All-Share have topped 10%.
What now?
Tracker dividends have gone flat and gilts now offer a much greater income than the index. Looking at my tables, I think this situation is not dissimilar to 1998-2001 -- a period in which anyone investing would have generally endured poor subsequent returns.
Overall, I get the impression today's All-Share is not cheap -- and I could understand if you wanted to Prepare For A Downturn.
Maynard writes for Champion Shares, The Fool's share-tipping service. Discover the shares he believes can beat the market with this free 30-day no-obligation trial. Maynard also owns iShares FTSE 100, an exchange-traded fund that tracks the FTSE 100 index, and contributes regularly to a pension-scheme index tracker.
