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Rupert Hargreaves
Rupert Hargreaves
Articles (689)  | Author's Website |

If You Want Yield, Look to the UK

UK shares may be the best in the world for income hunters

February 19, 2017 | About:

At the time of writing, the S&P 500 index yields an average of 1.94%, which is one of the lowest average yields in its history. For the past 150 years, the only period when the index’s average yield has been less was the decade between 1997 and 2007 when it was arguably in bubble territory.

For income seekers, this low yield is a depressing metric. There are stocks within the index that yield more than the average, but they are few and far between. 10 stocks currently yield more than 5% and 20 stocks yield more than 4%. There are 83 stocks with no dividend payout at all.

Look outside the U.S. for income

With the number of income opportunities limited in the S&P 500, income investors may find better opportunities outside the U.S., and one region that’s known for its dividend stocks is the U.K.

At the time of writing, the U.K.’s leading index, the FTSE 100 supports a dividend yield of 3.6%, a full 85% above the S&P 500’s average yield. What’s more, there are plenty of stocks inside the FTSE 100 that yield 5% or more.

Take GlaxoSmithKline (NYSE:GSK) for example. Glaxo is one of the world’s largest pharmaceutical companies but unlike its U.S. peers, which all offer little in the way of income, Glaxo pays out the majority of its earnings to investors via dividends. The company’s shares trade in both dollars (ADRs) and sterling, so there’s no need to worry about exchange rates. The shares currently offer a dividend yield of 4.5% for the ADRs and just under 5% for the U.K.-listed shares.

Glaxo isn’t the only company that has a U.K. and U.S. listing with a dividend yield of around 5%. Shares in BP (NYSE:BP), one of the world’s top five Big Oil companies, currently yield more than 7%, for both the U.K. and U.S. shares.

Yield makes up for risk

Companies only listed in London may come with the added risk of currency fluctuations for U.S. investors, but the extra yield more than makes up for the risk of investing overseas. Some of these companies are trading at downright cheap valuations despite their leading positions in the market.

Take pensions and long-term savings provider Legal & General. This business has been around for nearly 200 years and manages long-term savings as well as retirement funds. The shares trade in London for 244 pence a piece and support a dividend yield of 6%. The payout is covered 1.4 times by earnings per share, leaving plenty of room for payout growth or earnings volatility.

Another pick that has a listing both in the U.K. and U.S. is China-focused bank HSBC. Unlike other banks, HSBC has been able to keep its dividend payout in place thanks to growth in Asia offsetting problems in the rest of the world. Today, the London listed shares support a dividend yield of 5.8%.

Large cap income

All of these picks are not just U.K. backwater companies. They are all international firms with a presence both inside and outside the U.K. In fact, of the four companies mentioned above, only Legal & General reported earnings in sterling. The rest report earnings and pay dividends to investors in dollars.

There are two main advantages to investing in U.K. dividend stocks. The first is the higher level of income on offer compared to U.S. firms. Second, by investing outside the U.S., you can build a degree of international diversification, even though these firms, like many of the S&P 500’s constituents, are global businesses.

Further, outside the FTSE 100 there are even more income stocks to be found, and dividend yields of 6% or more are not uncommon. However, by investing outside the U.K.’s leading index, investors open themselves up to currency fluctuations.

All in all, if you’re looking for globally diversified income in a stable market, the U.K. could be the place to start your search.

Disclosure: The author owns shares in GlaxoSmithKline.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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