News
Opportunities to Invest
06/11/2008
Opportunities to invest
With all global stock markets lower since the start of the year and the FTSE 100, arguably the primary stock market index in the UK down over 30% year to date - all we seem to be hearing is how gloomy it’s looking for investors.
Unless you have been living on a different planet, you would have found it hard to avoid the constant mention of the current global economic crisis and how this has subsequently resulted in most companies seeing large chunks wiped off their market value. However, for investors, there are still good reasons why now could be a great time to be invested in the stock market.
Many people simply ignore one of the most important elements of a funds total return - dividend income. Dramatic falls in share prices have subsequently led to dividend yields reaching their highest levels for a long time. If we look at the FTSE All-Share index, the dividend yield is up to 4.6%. By contrast, the yield on a 10-year gilt is only 4.4%. This is the first time this has happened in over 5 years.
The financial sector, which has been the biggest casualty of the credit crunch so far, offers some very good dividend yields. As of today the top 3 UK banks current dividend yields are:-
Royal Bank of Scotland - 42.40%
Halifax Bank of Scotland - 42.20%
Lloyds TSB - 17.50%
(Source - dividendinvestor.co.uk)
Although after the recent government intervention future dividends from the banking sector maybe reduced, many company share prices are now at record lows and this offers investors the opportunity to benefit from high starting income levels. This coupled with the potential for future growth also makes them a good investment to help combat inflation.
That’s the income story, what if you’re looking for growth? Dividends make a huge difference to equity returns if an investor can resist the temptation to spend the income and, instead, re-invest them by buying more shares.
If you consider the current global turmoil and the impact this has had on stock markets worldwide. Fidelity research shows, £1,000 invested in a basket of leading shares only rose by a modest 4% to £1,040. But an investor who re-invested the dividend income from those shares would have seen their portfolio rise in value by more than 40% to £1,404. Longer-term, the impact is even more dramatic. If you had invested £100 in 1945 in the UK stock market, the capital alone would have grown to £8,511 by the end of 2007, according to Barclays Capital. But re-investing the dividend income along the way would have turned the £100 starting capital into £131,639 - 15 times as much.
Research from Fidelity has shown that dividends paid by UK companies with a stock market listing grew in all but five years since 1965 and in most years, dividends grew faster than the rate of inflation. By contrast, the market has fallen in 11 years over the same period. While shares can and do go up and down, dividends nearly always grow. So if you’re still waiting for share prices to fall further and dividends to rise, you may miss the boat. Predicting the short-term course of share prices is not easy, nobody in the 200-year history of stock markets has succeeded in doing this on a consistent basis. There are just too many random factors involved to be consistently right with predictions.
However, whether you need an income now or you are looking to build up a tidy sum for the future, the opportunity of a high starting yield and potential for future growth will help you achieve your goals.
To find out more about any of
the services we’ve mentioned
simply:
- Contact your SFS Financial Adviser
- Call a member of our Client
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