Recent volatility has seen schemes shunning equity markets, allowing share dividends to become overlooked. Andrew Short explains why this returns generator may be making a comeback
New Year’s Eve 1985 and the people of the UK – most sporting mullets and spandex – are singing Auld Lang Syne. Instead of joining the celebrations, boffins at Vodafone are busy making the first UK mobile telephone call just a few minutes after Big Ben’s chimes.
As mobile phones have shrunk from the size of bricks to a box of matches, Vodafone has become the largest company of its kind. Now every second citizen in the UK has a mobile phone and around one third are connected to Vodafone.
If you’d been holding Vodafone stock and reinvesting the dividends you’d be a very happy person indeed. However, with the many stockmarket crashes and ups and downs you’d be forgiven if you’d sold out into something less risky.
Revulsion of the equity markets in the past decade because of high volatility has pushed pension schemes further into fixed income instruments – but at what cost? There has been a relative collapse in sources of high-quality fixed income, and the returns on most of these products are near zero or in negative territory.
This situation has triggered a search for other sources of regular income and one method regaining traction is dividend income investing. And it’s not just in the UK where there is a strong culture of payments – fund managers and pension schemes are also now looking at other areas to find these sources of return.
Share dividends are often overlooked as a component of company return – especially in our capital growth obsessed society. They can provide solid long-term returns and are starting to look compelling according to Barnett Waddingham associate Alex Pocock.
“Especially when you have credit default swap (CDS) spreads telling you that some companies are more secure than countries. You have to start looking at dividends as a source of income,” he says.
The Barclays Equity Gilt Study 2011 also outlined the rewards from reinvesting dividend payouts.
It revealed that one hundred pounds invested at the end of World War II would have been worth just £4,370 in 2011 in nominal terms. However, reinvest the gross dividends and the same £100 would have grown to £136,107.
According to the Capita Registrars UK Dividend Monitor Jan 2012, companies paid out a record £67.8bn in gross dividends to shareholders in 2011 – an increase of 19.4% compared to 2010.
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