The screen I’m reviewing this week attempts to hunt for safe yields. Over recent years UK investors have been given plenty of reasons to doubt the safety of many high-yielding shares. Recent examples of high-profile dividend cuts include Vodafone and Marks and Spencer. More dividend stalwarts may well follow, whether due to declining cash generation from mature capital-intensive businesses (the Vodafone example) or threats to the business from industry disruption (Marks and Spencer).
One way investors can seek to avoid dividend disappointment is simply by not being too greedy. At a time when many government bonds around the world offer low or even negative yields, income hunters should view with extreme suspicion any share that offers a dividend yield of over 7 per cent – or perhaps even 6 per cent. Indeed, the fact that the FTSE 100 index currently yields 4.8 per cent can be interpreted more as a reflection of the challenges faced by many of its key constituents rather than an indicator of value.
While the need to treat high yields with caution seems particularly pertinent at the moment, extreme valuation has always served as an important warning for investors. That’s a key reason my Safe Yields screen does not set an overly aggressive target for the income it expects from shares. The screen’s key dividend test is that shares should offer a historical yield of 3 per cent-plus.