June 19, 2010 3:00 am

Investors look to offset BP setback

Investors have been buying high-yielding stocks in utilities, pharmaceuticals and telecoms to soften the blow to their income portfolios after BP halted its dividend.

But fund managers warn the dividend hole left by BP will be difficult to plug. The oil company paid the highest dividend of any UK company in the fourth quarter of last year and makes up almost 15 per cent of the total yield on the FTSE 100.

Many fund managers, surprised by BP's decision not to pay the first-quarter dividend due on Monday, accept that pay-outs this year will be lower as a result. They also face the dilemma of realising a capital loss on BP shares or seeing their income fall further if they hold on to the stock.

Richard Harvey, an income fund manager at M&G, said: "The suspension of an already declared dividend is a blow. It is a huge hole to plug."

Capita Registrars estimates that UK private investors will lose about £525m of income this year as a result of BP's decision to cancel its 2010 dividends.

The suspension is a blow for investors in search of income, with cash yielding little and corporate bonds less than they did a year ago. But private client brokers and fund managers say the impact should not be overstated.

Rensburg Sheppards expects other FTSE All Share Index companies to raise their dividends by more than 10 per cent in 2010, offsetting the BP loss. Analysts at Evolution Securities say investors should "focus on the other dividends that are available and look for ways to make up their income shortfalls".

Stockbrokers have been sending out top tips of alternative high-yielding stocks, among them Shell, Vodafone and GlaxoSmithKline.

Research from Capita Registrars found private investors sold off holdings in the energy sector in the three months to the end of May, many switching into utility companies instead.

Others have turned to alternative asset classes. Barclays Wealth, the private banking arm of Barclays, says many clients have turned to corporate bonds and gilts as well as relying on a yield from property. Some moved into offshore insurance bonds.

Investment trusts are also cashing in: companies that invest in debt and infrastructure have raised money to meet demand from private client brokers.

But many investors are waiting until the Budget on Tuesday to tweak their portfolios. Charles Hoffman, head of HSBC Private Bank, says that many investors became disillusioned with income-producing investments because they were taxed so highly relative to capital gains products. With the taxes set to be aligned, he predicts many to review investments next week.

Editorial Comment, Page 10

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