Who makes the grade?

Inspired Gaming

Another company that looks promising – even the analysts' consensus view is that it is a buy – is Aim quoted Inspired Gaming. This company, however, is in need of some inspiration and direction. It has decided to quit the pub business and is selling this division to Danoptra for a nominal consideration. Inspired may well come out of this sell-off leaner, but it will take time for the dust to settle and directors do not expect to recommend the payment of a dividend for the current financial year. This one's also got to go.

Abacus

Electronic components distributor Abacus is also rated a strong buy by analysts, but recent developments are worrying and so it, too, must be ditched from our list. The company has decided to cut the dividend to make certain it is covered at least two times. If the dividend were to be reduced any more it would take the company above the five-year threshold.

Styles & Wood

Property services company Styles & Wood is an untried entity. It has enjoyed 14 years of revenue and profit growth, but it has experienced significant project deferrals recently along with margin pressure. What's more, second-half revenue will not exceed that for the first half. The company has just paid a maiden dividend of 3.75p and there are no indications that future payments will be made. A company to be treated with caution.

Dawnay Day Carpathian

Dawnay Day Carpathian has just completed the second phase of the acquisition of 31 retail units located in Warsaw. This means it now has total ownership of the retail units within Marina Mokotow. The company's investment portfolio consists of property within Eastern Europe and it has invested the available funds ahead of its target timetable. The board has set a new dividend objective for 2008 of 8p per share – a reduction of 2p increases the time period to recoup your investment to 4.8 years.

Marchpole

Luxury clothing fashion brand management group Marchpole intends to maintain its total dividend distribution for the next period. The first-half results show a slowdown in profitability, but it is expanding into the lucrative areas of Russia, Eastern Europe and Asia, which should contribute to the future earnings of the group over the next three years.

Norcros

Norcros is a home consumer products group with operations in the UK and South Africa. Its UK operations have remained resilient in the face of a downturn in consumer spending and it has delivered strong revenue benefits and strengthened its market position in South Africa. The company only joined the market on 16 July 2007, so it has no track record to speak of, but it is trading well.

Pendragon

Lastly, car retail network Pendragon is experiencing a decline in activity levels for both new and used cars, and it will be exposed to any further slowdown in the wider economy. To reduce its fixed cost base, the company completed a redundancy programme resulting in almost 500 job losses. However the company continues to be profitable and cash-generative, and dividends are to be maintained.

Conclusion

There are tough times ahead, but if share prices fall even further then the time it takes to recoup your investment cost will also be reduced. This way your investment is paid for in a relatively short time period, and any payment after that is an added bonus.

Dividends nearly always grow

Encouragingly, according to analysis by Fidelity International, dividends nearly always grow, regardless of whether share prices

are rising or falling. Since the beginning of 1965, dividend payments from the UK market have shown an annual increase in all but five years. Annual increases in dividend payments ran into double percentage figures in almost half of the past 42 years, peaking at 24 per cent in 1979.

The golden period for dividend growth was the seven years between 1984 and 1991 when payouts rose by a minimum of 12 per cent each year.

In the five years when aggregate dividend payouts failed to rise, the decreases were small in all but one year. The years were 1967 (-2 per cent), 1993 (-1 per cent), 1998 (-14 per cent following a change to dividend tax credits that also hit pension funds), 2000 (-3 per cent) and 2001 (-0.2 per cent). In the majority of years, Fidelity also found that dividend growth exceeds inflation. The exceptions have been a bout of hyper-inflation in the mid-1970s.

Fidelity also points out that anyone who invested £1,000 in the FTSE All-Share Index 10 years ago would today have a portfolio worth £1,040 – unless they reinvested the dividends. In this case, their portfolio would be worth £1,404.

An upfront return

Mike Lenhoff, chief strategist at Brewin Dolphin, recommends that we trust the dividend yield because, although dividends are vulnerable to cuts, they are far less volatile than earnings. Over the past 40 years, says Mr Lenhoff, UK earnings growth averaged close to 11 per cent. As a measure of volatility, the standard deviation associated with that growth was 15.5. Dividend growth over the same period averaged 8.5 per cent. The standard deviation associated with this growth was 7.5. "Having fluctuated less than earnings in the bad times as well as in the good times, dividend growth has been half as volatile as earnings growth. The dividend yield you see may not be quite the dividend yield you get, but it is still likely to be a good guide to value," says Mr Lenhoff.

The prospective dividend yield for the FTSE 100 is over 5 per cent.

It's also higher, for the second time this year, than the yield on 10-year conventional gilts, which suggests that value is returning to the UK equity market. The table below shows Mr Lenhoff's selection of high-yielders for value investors. These shares have above-average dividend yields and they are also companies for which the risk of a dividend cut is judged to be minimal. And, although the list reflects Mr Lenhoff's conviction that the dividends will not be cut, he reminds investors that the risk is always there, alongside the risk of no dividend growth.

Still, "on average the yield for this small sample of shares is 6.75 per cent. This illustrates the kind of upfront return that is now available in the UK equity market", he says.

Rosie Carr