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Would you like cover with that yield?

 

Source: Schroders/Thomson Datastream/MSCI

 

Schroders was kind enough to let us loose on their underlying data to produce the scatter diagram below, which shows the trade-off between yield and cover on a stock-by-stock basis (a few extreme bits of data have been chopped to make the chart intelligible). Clearly, if investors want a decent yield these days it's not likely to be coupled with a great deal of dividend cover.

 

Source: Schroder/Thomson Datastream

 

The median cover for the highest-yielding half (2.6 per cent and over) of the UK's leading shares currently stands at just 1.9 times. Meanwhile the highest-yielding quarter (3.7 per cent and over) of leading shares have a flimsy median cover of 1.6 times. At the other end of the spectrum, the lowest-yielding quarter (2 per cent and below) of shares offer a more reassuring median cover of three times.

A high yield with low cover can often be a dangerous combination. As Mark Slater, manager of the top-performing MFM Slater Income fund, says: "If a company is busting a gut to pay a very high yield and that's all it can do, then it may very well be a value trap."

One key question that comes out of all this is: which stocks do the best job of combining yield and cover? A ranking methodology outlined by hedge fund manager Joel Greenblatt in his investment classic "The Little Book That Beats The Market" offers a great way to try to answer this question. The Greenblatt method - he used it for his earnings-focused magic formula - is to rank shares by their yield, then rank them separately for their dividend cover, and then add the rankings together to produce a combined ranking to identify the most attractive shares. On this analysis, the most attractive leading UK shares (and there are some rogues in this particular gallery) are:

CompanyPriceDividend yieldDividend cover
3I GROUP492p4.1%3.65
KENNEDY WILSON EU.RLST.1,184p3.4%3.70
CENTAMIN60p3.2%4.20
PETROFAC892p4.7%2.56
RIO TINTO2,388p6.2%2.34
BANK OF GEORGIA HDG.1,743p3.4%3.20
HUNTING518p3.3%3.23
MAN GROUP161p4.6%2.40
WOOD GROUP (JOHN)639p2.9%3.56
INTERNATIONAL PSNL.FIN.398p3.1%3.24
GKN292p2.9%3.45
WEIR GROUP1,404p3.1%3.20
INTERSERVE585p4.0%2.56
NORTHGATE500p2.9%3.45
ANGLO AMERICAN741p7.4%2.02
AVIVA484p3.7%2.56
POLYMETAL INTERNATIONAL483p2.8%3.38
DEBENHAMS76p4.5%2.18
ROYAL MAIL464p5.0%2.04
ROYAL DUTCH SHELL B1,707p7.1%1.90
SAINSBURY (J)243p5.4%1.95
WILLIAM HILL360p3.4%2.49
CREST NICHOLSON HOLDINGS553p3.0%2.71
HOME RETAIL GROUP152p2.5%3.26
NOSTRUM OIL & GAS490p3.7%2.26
AGGREKO1,067p2.5%3.10
OLD MUTUAL200p4.5%2.06
KELLER983p2.6%2.94
PHOENIX GROUP HDG.844p6.3%1.81
AMEC FOSTER WHEELER807p5.4%1.84

Source: Schroder/Thomson Datastream