It may now be tempting to flee to the remaining income havens – sectors like pharmaceuticals and tobacco – and, judging by the 12 per cent move in BAT's shares this week, many are doing just that.
The kind of massive, but hard-to-predict, disasters that afflicted the banks and BP are just as possible in other sectors. They're known, with grim irony given the oil-soaked seabirds currently struggling in the Gulf of Mexico, as "black-swan events". Go back to 2005 and you'll find one in pharma: Vioxx. Merck's arthritis treatment was found to increase the risk of heart attacks, and at one stage the US group’s liabilities were estimated at as much as $50bn.
The company ended up paying out a lot less than that, but one thing is clear: relative freedom from cyclical risk does not mean that an asset is risk-free, especially where human health is involved.
Some defensive sectors are less risky than others, though. The telecom and utility industries may still be subject to intense regulatory scrutiny, but at least that can be managed, and is a lot more predictable than drilling for oil in hurricane-prone waters two kilometres deep.
So Vodafone, at one time a sexy growth stock, remains one of the UK's most reliable dividend payers, generating huge cash flows from a global customer base of more than 400m across over 30 countries. Its shares currently yield over 6 per cent.
Uncertainty over the dividend policies of water utilities has also now evaporated, now that regulator Ofwat has published its latest five-year pricing review. Its findings will mean some dividend cuts, but they're in the price and the sector still offers an average yield in excess of 5 per cent. Our preferred play is United Utilities, yielding 6.1 per cent.
If you're still hungry for dividend safe havens, it may be worth tucking into food and beverage shares, although we'd prefer those from the retail side of the industry that sit atop the food chain. While Tesco still leads the UK supermarket pack with its huge market share and a fast-growing overseas business, Sainsbury's is increasingly looking like the value in the sector. It now yields 4.5 per cent on a payment covered 1.7 times and its shares are backed by a property portfolio worth £10bn. Straying into slightly more cyclical territory, even Marks and Spencer is now yielding 4.5 per cent – covered twice by earnings – and also has the potential for capital appreciation should new chief executive Marc Bolland repeat his Morrison magic there.
THE FTSE100'S TOP DIVIDEND YIELDERS
| Name | Price (p) | Market cap. (£m) | 1 yr change (%) | Forecast div. yield (%) | Div. cover (x) | Historic PE (x) | Forecast PE (x) |
|---|---|---|---|---|---|---|---|
| MAN GROUP | 244.9 | 4,194 | -13.39 | 13.03 | 0.9 | 9.4 | 12.9 |
| NATIONAL GRID | 507 | 17,576 | 5.19 | 8.44 | 1.5 | 12.1 | 8.8 |
| ASTRAZENECA | 3057 | 44,065 | 16.28 | 8.12 | 3.1 | 3.4 | 6 |
| AVIVA | 344.3 | 9,659 | -2.19 | 7.75 | 4.2 | 9.8 | 10.5 |
| RSA INSURANCE GROUP | 122 | 4,207 | 0.16 | 7.51 | 1.5 | 10 | 9.5 |
| STANDARD LIFE | 185.1 | 4,183 | -1.33 | 7.35 | 2.4 | 6.4 | 11.3 |
| UNITED UTILITIES GROUP | 565 | 3,851 | 5.12 | 6.75 | 1.7 | 9.5 | 9.8 |
| HOME RETAIL GROUP | 231.5 | 1,974 | -13.3 | 6.35 | 1.7 | 10.1 | 10.3 |
| SCOTTISH & SOUTHERN ENERGY | 1110 | 10,247 | -2.46 | 6.32 | 1.6 | 14.2 | 8.4 |
| BRITISH LAND | 459.5 | 4,014 | 15.74 | 6.29 | 1.1 | 9.5 | 14.3 |
| SEVERN TRENT | 1284 | 3,043 | 10.03 | 6.26 | 1.7 | 8.8 | 9.1 |
| ROYAL DUTCH SHELL B | 1721 | 46,395 | 2.44 | 5.93 | 1.2 | 16.2 | 16.5 |
| VODAFONE GROUP | 141.85 | 74,714 | 23.67 | 5.87 | 1.9 | 10.5 | 15.2 |
| THOMAS COOK GROUP | 204.8 | 1,758 | -7.54 | 5.83 | 2.6 | 7.3 | 7.6 |
| SEGRO | 275 | 2,039 | 9.82 | 5.79 | 4.1 | 9.9 | 9.9 |
| GLAXOSMITHKLINE | 1200.5 | 62,336 | 7.62 | 5.74 | 2 | 4.8 | 14.5 |
| BT GROUP | 138.4 | 10,731 | 42.98 | 5.54 | 2.7 | 7.4 | 8.1 |
| BAE SYSTEMS | 323 | 11,098 | -0.15 | 5.51 | 2.5 | 7.9 | 7.5 |
| TUI TRAVEL | 228.7 | 2,557 | -4.01 | 5.29 | 1.9 | 6.9 | 7.3 |
| LEGAL & GENERAL | 83.15 | 4,877 | 30.53 | 5.13 | 4.2 | 5.1 | 7.9 |
| BRITISH AMERICAN TOBACCO | 2190.5 | 43,739 | 31.4 | 5.05 | 1.4 | 15.2 | 12.7 |
| LAND SECURITIES GROUP | 617 | 4,703 | 20.74 | 5.04 | 1.2 | 18.1 | 17.8 |
| SAINSBURY (J) | 319.7 | 5,958 | -3.41 | 4.93 | 1.7 | 13.4 | 12.8 |
| CENTRICA | 290.8 | 14,962 | 27.54 | 4.89 | 1.7 | 13.3 | 12.3 |
| MARKS & SPENCER GROUP | 344.1 | 5,446 | 18.45 | 4.84 | 2.2 | 10.4 | 11 |
| HAMMERSON | 363 | 2,569 | 13.44 | 4.73 | 1.3 | 18.4 | 18.1 |
| ICAP | 417.3 | 2,727 | -8.29 | 4.68 | 2 | 12.1 | 12.2 |
| REED ELSEVIER | 496.8 | 6,030 | 4.48 | 4.57 | 2.2 | 10.8 | 11.9 |
Small wonders
'Dividend clustering' has been one of the key investment themes over the past 18 months. Put simply, UK pension fund managers are too reliant on too few companies for dividend income. After bank payouts bit the dust in 2009, two-thirds of dividends were paid by just 15 companies, with BP alone accounting for a large chunk of that. Now its payout is under threat.
The problem UK income fund managers have had is that the volume of money they manage draws them towards mega-cap shares, which they can trade in and out of more easily. Alex Stewart, income specialist at Evolution, likens small- and mid-cap yield shares to the fictional Hotel California – "you can check out any time you like, but you can never leave".
Private investors have fewer such worries, and therefore have a much broader range of income-generating companies from which to choose. A re-run of the stock screen we built back in March, covering everything outside of the FTSE 100, reveals 227 companies yielding more than 4.06 per cent (the 10-year gilt rate at the time; these days you can only get 3.55 per cent from lending to the government for a decade). Of that total, 69 have dividend cover of at least two.
The Alternative Investment Market (Aim) provides the richest pickings – 60 companies there offer a gilt-plus yield, with 22 of those covering it more than twice. That’s a similar level to the FTSE 250, where 17 of 59 high-yielders have a dividend cover of 2 or more. There are 80 companies in the small-cap index with a trailing yield of more than 4.06 per cent, but just under a quarter offer cover of more than 2, a lower proportion than other smaller company indices.
Of course, investing in small companies is at least as risky as investing in large companies that are undertaking complicated, expensive and dangerous capital projects. But at least extending the income to smaller companies gives investors a greater pool of opportunities across which to spread their risks. There's also evidence to suggest that a decent and well-covered dividend is a better indicator of long-term value, the reasoning being that dividends are tangible and incontrovertible, while earnings are easily manipulated.
