It’s payback time in a flat market

W ith stock markets moving sideways for months, the wisdom of maintaing a defensive stance has been reinforced. May, in particular, is a very good month for dividend payments, and almost every day there has been a healthy income boost into my broking accounts or my self-invested personal pension (Sipp).

It started with 4Imprint, a promotional products company, on May 4, with a yield of 5 per cent, then followed British American Tobacco (4.2 per cent), Morgan Sindall (5 per cent), Devro, a sausage-skin maker, (4.2 per cent), Aviva (5.9 per cent), and closed-end life assurer Chesnara (7 per cent).

On top of these hefty dividends, May has seen some smaller but fast-growing payments from the likes of Serco, Capita and Rotork. Capita, for example, has produced a sixfold increase in dividends since 1999, even though the company’s profit growth hasn’t in recent years been reflected in a higher share price. Valve-designer Rotork has increased its payments 10-fold since 1991, though that has been outweighed by the soaring share price, so the yield for recent purchasers such as myself (buying into the company last year) still isn’t exciting at 1.85 per cent.

Likewise, there have been numerous payments from permanent income bearing shares (Pibs), preference shares and subordinated bonds. May seems to get more than its fair share of these too, with Lloyds’ enhanced capital notes (ECNs) yielding 8 per cent and a subordinated bond in Standard Chartered yielding 7.5 per cent, both of which paid in the last couple of weeks. So, while share prices have done little, the portfolio has been sweating cash, ready for reinvestment.

There is much lamentation about the lack of available income in these times of high inflation. Yet there are still some excellent high-yield prospects for those willing to delve a little in their research. There are plenty of fairly safe Pibs and preference shares yielding more than 8 per cent, though getting narrow enough bid-offer spreads in thin markets may mean biding your time.

Two old Abbey National preference issues, rebadged as Santander UK, are yielding around 8 per cent net, equivalent to almost 10 per cent on a bond. The Raven Russia preference share (ticker RUSP) has a reliably competitive spread, which means that you get very close to the indicated 8.96 per cent yield. The Yorkshire Building Society convertible notes maturing in 2025 top the bill with a 10.6 per cent gross running yield but, as they trade over par, the yield to the fixed maturity is just shy of 10 per cent.

Most such issues can be dealt through discount brokers, though almost always by telephone rather than online. Most issues with at least five years to run can be put into an individual savings account (Isa) and almost all can be put into a Sipp.

The value in these markets persists because they are too thin to encourage much broker research, and vulnerable to sentimental backwash in the ongoing debate about bank capital requirements and, currently, the interplay with sovereign debt. However, for those prepared to research the individual issues as well as the many technicalities, they can be very rewarding. The income I have continued to receive justifies their inclusion in my own portfolio, especially when markets are going sideways.

Nick Louth is an active private investor, writing about his own investments. He may have a financial interest in any of companies, securities and trading strategies mentioned.

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