These income shares are the favourites of fund managers.
At this time of the year, investors aren't short of predictions as to what the next twelve months will bring. But what's interesting about BofA Merrill Lynch's monthly survey of fund managers is that the predictions expressed aren't the view of individual analysts or fund managers, but the collective insights of all those City experts surveyed by the bank. As such, coming from a broader sample, it can be considered as a better-than-average bellwether of City opinion and expectation.
And the good news from the bank's most recent survey is that 2010 is expected to be a year of moderate economic growth, benign inflation, and solid returns in global equities. As others have observed, the contrast with 2009 couldn't be more stark.
Growth and profits
Optimism about the economy continued to strengthen, for example, with a net 80% of respondents expecting the world economy to grow over the next 12 months, up from the 69% expecting growth back in November. What's more, expectations for corporate profits are at their highest level since December 2003, prompting two-thirds of investors to expect that equity markets will return to traditional growth levels or better during 2010.
Concern about inflation remains muted, too, with a growing proportion of survey respondents predicting interest rates in both Europe and America to remain at present levels until at least the second half of the year.
In short, cautious optimism rules the day -- a sharp contrast to sentiments a year ago. "Investors are nervous but optimistic heading into the New Year; and respondents are looking for a 7.7% total return from global equity markets," observes Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
What's more, the positive outlook comes in spite of sharp movements out of bank stocks. A net 28% of respondents are now 'underweight' in bank stocks compared with 11% in November -- a monthly swing of 17%, and a significant change in sentiment.
"A year ago strong pessimism over bank stocks would have spread across the market, but now it appears to be isolated to the banks," says Gary Baker, BofA Merrill Lynch's head of European equity strategy. "Investors seem to be saying they can be optimistic on markets, even without bank support."
Picks to prosper
So what sort of companies will reward investors most in this kind of economic environment? As reported the other day on Citywire, BofA Merrill Lynch researchers have run some screens to try and answer the question.
The filter criteria: non‑financial companies with a dividend yield greater than government 10-year bond yield, and with low risk of that dividend being cut, based on free cash flow and net income cover. The similarities with the sort of companies popular with investors on the Fool's High Yield Portfolio discussion board are obvious.
In short, the eight companies listed below all have a dividend yield greater than 3.5%, debt of less than 60% of equity, and dividends that are less than 75% of free cash flow, and less than 60% of net income.
High payers, in other words, but also reasonably safe payers, too. With luck, no dividend cutters here. And in a year where plenty of companies have not just cut their dividends, but passed them altogether, that's something to find reassuring.
So who are they?
While the companies listed won't be entirely unfamiliar to readers of our High Yield Portfolio discussion board, there is one important difference. The shares identified by the BofA Merrill Lynch researchers include a smattering of FTSE 250 shares too, while High Yield Portfolio (HYP) picks have a predilection for FTSE 100 shares.
So here they are:
- AstraZeneca (LSE: AZN), the FTSE 100 pharmaceutical giant, and a HYP favourite.
- Antofagasta (LSE: ANTO), the copper miner.
- IMI (LSE: IMI) -- a company I last wrote about here.
- Meggitt (LSE: MGGT) -- a specialist aerospace and defence engineer.
- Sage (LSE: SGE) -- another company I've written about.
- Thomas Cook (LSE: TCG) -- the venerable holiday giant has proved surprisingly resilient to the downturn.
- Vodafone (LSE: VOD) -- global mobile telecoms, and another HYP favourite.
- William Hill (LSE: WMH) -- a long-established gambling firm offering 'sin share' exposure.
Tortoises, not hares
Be warned: these shares are not necessarily poised to race away once economic recovery becomes better established. Instead, as BofA Merrill Lynch's Gary Baker points out, they are stocks that represent opportunities for investors looking for a safe dividend yield. Go-go growth stocks they aren't.
But as investors turn from looking to fixed-income to equity-income exposure to generate an income, these eight shares are as good a place to start as any.
Of especial attraction is the safety element: as investors have found, relying on FTSE 100 status and a reasonable dividend cover doesn't always provide dividend certainty. To that extent at least, these eight shares merit careful consideration by investors looking for equity income.
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