Take your growth, or capital gains, hat off and don an income investment one instead. With the stock market in freefall, it would be considered contrarian or even downright crazy to contemplate investing in equities. Yet, think income rather than capital appreciation and maybe the time is ripe for investing after all.
We've taken 3,812 companies quoted on the main and Aim markets, screened them and come up with a list of nine companies and three investment trusts that, thanks to their strong dividend yields, could pay for themselves in under five years.
True, these are not low-risk shares. The high yields suggest that investors believe that a dividend cut is imminent. However, our screens have sifted out those where such a cut is least likely.
Trawling the markets
Our first screen searched purely for high dividend yielders but, with the stock market crashing, company dividend yields are sky high. Land of Leather, whose share price has fallen from 225p to 3.375p in the space of a year, has a yield of 209 per cent. Other companies appearing in this list are: Barratt Developments (55 per cent), Bradford & Bingley (46 per cent), Taylor Wimpey (45 per cent) and Sport Media (41 per cent). Out of all the companies on this list, one is worthy of consideration. Sport Media is neither a bank nor is it in the building and construction industry – neither of these sectors is flavour of the month. It does, however, distribute digital content via mobile phones and the internet as well as publishing national newspapers. Its pre-tax profits have been steadily rising over the past four years and have increased 84 per cent over the period. Plus the company directors have been actively buying shares this past month.
But it's not all good news. The Daily Sport was relaunched on 21 April and so far the result has been disappointing. The group has admitted that the pre-tax profit for the full year to be lower than expected. Nevertheless it will still be around £6m, which is some 13 per cent higher than the previous year. The company has acquired Flip Media and there has been a board reorganisation along with cost reductions.
As a result, a consensus of analysts rate Sport Media a strong buy. If the current dividend of 6p a share is maintained, then it will take only 2.25 years to recoup your money if you buy the shares now at 13.5p a share.
Don't rely on share screening alone
Screening for companies that have large dividend payouts per se isn't that helpful because it produces a list of companies with top-heavy share prices. Camellia, for example, pays a whacking 92p dividend, but its share price is £82 and it would take you 89 years to recoup your initial investment.
The best dividend payer within this list is Mapeley, which pays 188p a share and has a share price of £10. Taking only five years to recoup your money, the company looks a good investment. But, probe a bit deeper and it turns out that the dividend is going to be paid semi-annually in the future and at a revised payout ratio. The company's first-quarter results, to 31 March 2008, also reveal a pre-tax loss. Not such an ideal choice after all – and a warning not to rely on share screening alone.
So let's narrow the field even more by searching for companies where it would take less than five years to recoup your share spend by receiving dividend income, then delete all those companies that have net debt in excess of £250m and any company that is loss-making. This leaves us with nine companies (including Sport Media from the first screen) and seven investment trusts, to consider.
And the list of nine equities can be filtered down even further. Times are tough and they are not going to get any easier with the stock market in meltdown mode and very little good news on the economic front. How are these nine going to cope and will they be able to sustain dividend growth in particular?
