Dividends Still Thrash Cash, Gilts And Property

UK company dividends have been a rare bright spot for savers in recent years.

While cash pays 1% or 2% at best, plenty of top FTSE 100 companies yield 5% or 6%.

Now a new report seems to suggest the party is coming to an end. Capita’s latest dividend monitor shows FTSE 100 dividends falling 1.1% in the past year.

Happily, a closer look at the report shows there’s little to worry about. Dividends will continue to thrash returns on cash, not to mention rival income sources, including property and gilts.

Down But Not Out

Weak earnings, the strength of the pound, and the global slowdown have all knocked UK company dividends, Capita says. As has newly-downsized Vodafone, which has cut its dividend sharply.

Q3 saw the weakest underlying growth in three years, but Capita says 2015 is shaping up to be much better. 

That’s partly because this year’s sterling recovery probably hasn’t got much further to run. That should help boost the value of overseas earnings once converted back into pounds, allowing companies to bolster their dividends.

Across the UK stock market, underlying dividends should rise by 5.5% next year, Capita says.

Superior Income

Dividends continue to overpower rival sources of income, Capita says.

While 12-month yields on equities have slowed to 3.9%, other asset classes continue to trail. 

Yields on 10-year gilt yields have fallen to 2.45%, property rental yields are down to 3.5%, and cash deposits earn just 1.5%.

Capita’s conclusion is clear: “For an income investor, equities are therefore still providing a superior yield.”

Field Of Yield

By careful stock selection, you can get a higher yield than 3.9% from relatively low risk, defensive FTSE 100 stocks.

Pharmaceutical giant GlaxoSmithKline, for example, currently yields 5.81%, as does British Gas owner Centrica. Another utility, SSE, yields 5.62%.

Oil giants BP and Royal Dutch Shell both yield around 5.3%.

The troubled supermarket sector offers some amazing yields, for those willing to take on more risk. Morrisons yields 8.35% and J Sainsbury yields 7.16%. 

Don’t get too greedy, there is a danger that both will follow the example of Tesco, and cut their dividends.

Buying individual stocks, even UK blue-chips, has its risks. But over the longer run, it is far more rewarding than cash. And gilts. And property.

Many investors underestimate the positive long-term impact of dividends. If you reinvest them for growth, they will typically deliver 40% of your total returns from the stock market.

At Motley Fool, we have learned to Respect The Power Of The Dividend. Now you can learn how to tap into this wealth-generating source by downloading our latest special report How To Create Dividends For Life.

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The Motley Fool recommends shares in Glaxo and owns shares in Tesco.