The strategy of "health-screening" dividend paying shares still holds up, with a positive trend shown on the performance charts for 2019. With markets expensive, the screen has tended to highlight more medium sized companies on the FTSE All Share. Although these companies have idiosyncratic risks, in aggregate these appear to have been rewarded with income an important part of the returns.
- Dividend yield is a sign of value so, when markets are expensive, many quality income stocks are trading on yields that signify a high price is being asked for the reliable, regular payments they offer investors.
- On the flip-side it’s important to question whether the shares that are still trading at an attractive yield are of the quality to be relied on for future income. Our screen looks at measures such as how well dividends are covered by profits and if forecast earnings growth suggests dividends can be maintained.
- Top of our FTSE All Share screen, German-focussed real estate investment trust Sirius Real Estate (SRE) passes all our tests. Shares are trading on a yield of 3.4 per cent and dividends are well-covered by earnings. The premium the shares offer is compensation for what is, after all, an illiquid underlying asset. That said, the reit structure is probably the most appropriate way to get exposure.
- On Aim, dividend yield needs to be assessed carefully and can still be a sign of a value trap. Financial Services business STM Group (STM) passes all our tests but investors will want to see strong signs of its negative share price momentum turning around. Likewise, investors need to think carefully before being seduced by the 9.8 per cent yield on M&C Saatchi (SAA) shares.
