Dividend Investors Should Be Worried

Today I want to inform you of something that I believe should worry vast numbers of ordinary investors.

But let me tell you first that this has nothing to do with American politicians letting their country run out of money…

…and triggering what some market commentators said was going to be the FINANCIAL APOCALYPSE.

There I was, with cash in hand – and tinned beans at the ready…

I must admit, last week I did hope a few crazy US senators would argue for a bit longer and prompt a major crash in the markets.

I mean, there I was, with cash in hand – and tinned beans at the ready – all set to strike for share-price bargains…

…but a last-minute agreement was reached on Capitol Hill and the FTSE barely moved.

Oh well, there’ll always be next time.

Indeed, we only have to wait a few more months before America starts to run short of cash once again and the next showdown among US politicians begins.

I can’t wait. My beans will keep until then, too.

Somebody far more important than politicians, bankers, regulators and commentators

In the meantime, I must inform you about something else on the horizon that could have significant repercussions for huge numbers of retail investors.

Now this event does not involve politicians, central bankers, City regulators or even market commentators.

In fact, it concerns somebody far more important than any of that lot. It’s actually news about investing legend Neil Woodford.

This news should be registering a 10 on your investment Richter scale

You may already know that Neil Woodford is set to leave Invesco Perpetual and start his own fund-management business.

Now I know I sometimes exaggerate a bit in these Collectives

…but this really is seismic news that should be registering a 10 on your investment Richter scale.

You see, Mr Woodford is perhaps the greatest UK professional investor working today. According to the Financial Times, Mr Woodford:

  • has THRASHED the market, turning £1,000 into almost £23,000 during his 25-year stint at Invesco Perpetual, and;
  • has become the biggest individual UK manager of client assets, with £33bn under his control.

Up to now, Mr Woodford’s mega money-making moves were all based on buying a select few large-caps that offered dependable dividends and attractive yields.

Indeed, about 22% of his portfolios are presently tied up in just three pharmaceutical names – GlaxoSmithKline, AstraZeneca and Roche – while a further 14% is invested in a simple trio of tobacco stocks – British American Tobacco, Imperial Tobacco and Reynolds American.

He also has 4%-plus of his funds invested in each of BT, BAE Systems, Reckitt Benckiser and Capita.

But I am convinced Mr Woodford’s blue-chip dividend investing approach could change dramatically when he sets up his own fund.

Far more exciting than reinvesting dividends into Glaxo

Why do I believe Mr Woodford could ditch high-income investing? Here are three reasons:

1) Why leave after 25 years aged 53?

Nobody leaves the same employer after 25 years aged 53 without a very good reason.

In fact, I am absolutely sure if Mr Woodford was truly happy with his current high-yield approach, he would stay at Invesco – and negotiate a healthy pay rise – rather than take on the aggro and risk of setting up and running his own firm.

So clearly Mr Woodford wants to change something… and his current investment strategy looks the most likely to me, because…

2) Mr Woodford has painted himself into a corner

I mean, he has already slammed dividend favourites Tesco and Vodafone and sold out of their shares, while oils, miners, banks and most utilities have been well off his radar for years now.

Declining incomes on popular yielders such as Diageo and Unilever have made life much tougher for him, too.

As such, Mr Woodford’s large-cap income universe has been shrinking consistently for some time now and is extremely limited at present…

..and so starting afresh with a new strategy would be the easiest way of escaping today’s lack of buying opportunities.

3) Mr Woodford is a growth/blue-sky investor already

Skim through the full annual reports of Mr Woodford’s Invesco funds and you will discover a vast array of unfamiliar companies.

I guess you may have heard of mid-caps Homeserve, Paypoint and BTG as well as insurers Amlin, Beazley and Catlin, all of which feature in Mr Woodford’s portfolios.

But what about healthcare small-caps Oxford Pharmascience, Tissue Regenix and Vernalis? Or blue-sky incubators IP and Imperial Innovations?

No, I have never heard of them either. But Mr Woodford must have spotted their potential…

…and I dare say calculating potential gains from such smaller names is far more exciting than reinvesting dividends into Glaxo every quarter.

What it might signal for blue-chip dividend stocks in the years to come

While many people are debating whether or not to stay with Mr Woodford’s funds, I am convinced there is a much more significant issue at hand…

That is, whether the City legend is now signalling it is time to drop dividend-paying blue-chips…

…and turn towards a completely different investing strategy.

Mr Woodford won’t comment on his new business until he quits Invesco.

But I am convinced he will leave the likes of Glaxo, BAT and Reckitt behind to instead invest in smaller, racier issues… and charge a hefty fee for anyone prepared to ride along with him.

All told, I believe we just cannot ignore the sudden actions of such an illustrious income investor… and what it might signal for blue-chip dividend stocks in the years to come.

So if you do hold the likes of Glaxo, BAT, Reckitt and so on, at least now you can prepare for what could be.

Mr Woodford’s departure date is 29 April 2014, so we’ll hopefully know exactly what his plans are soon after that.

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> Maynard does not own any share mentioned in this article. The Motley Fool has recommended shares in BTG, GlaxoSmithKline, Homeserve, Unilever and Vodafone, and owns shares in PayPoint.