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Three Safe Yield Buys

Another one of my screens has reached the ripe old age of five, boasting a performance record that substantially beats all comparable open-ended investment funds over the period
July 12, 2016

Safe yields seem an increasingly elusive quarry for equity investors. According to recent research by Share Centre and Capita, FTSE 350 dividend payments in 2015 were collectively not fully covered by profits, and for many income stocks the earnings outlook is not encouraging, especially in the wake of the uncertainty caused by Brexit. What's more, income hunters have experienced a number of big dividend disappointments over the past 12 months. This is partly reflected in the 10.5 per cent negative total return from the Safe Yields screen over the last year compared with a negative 2.5 per cent from the FTSE All-Share, which is the first time in the five years I've run the screen that it has underperformed the market.

There is arguably another factor at work in the disappointing 12 months experienced by the screen. Last year I speculated that some of the screen's very strong outperformance in the year to July 2015 may have come down to the fact that reliable dividend-paying equities had become very popular given the fall in bond yields, which had pushed up share prices and valuations. As some perceived safe income stocks have disappointed, a reassessment of such inflated valuations has added to the pain.

That said, while last year's selection of Safe Yield shares has not looked all that impressive during most of the last 12 months, the portfolio was a decent way ahead of the index before the Brexit vote, showing a positive 2.1 per cent total return compared with a negative 2.3 per cent from the All-Share (see table). So, all of the considerable underperformance and then some, has occurred since the referendum result. In fact, the portfolio can be viewed as being somewhat unlucky in having selected a number of stocks particularly exposed to the domestic economy.

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