LONDON -- As a staunch saver and investor, I'm really not fond of today's economic environment.
On one hand, little or no economic growth crimps business profits, while on the other, ultra-low interest rates and stubbornly high inflation keep undermining my cash's future buying power.
The tide is going out
Then again, I haven't felt very confident as an investor for about two years. Yet there have been two occasions in the past 12 months when my trigger finger got itchy indeed.
The first was during the depths of last year's slump, when the blue-chip FTSE 100 (INDEX: ^FTSE) index of elite British businesses crashed to 4,791 on Aug. 9, marking its 2011 low. Alas, being on holiday at the time, I was unable to take advantage of this obvious buying opportunity.
This week has been the second time that my finger has hovered over the "buy" button. However, given the ongoing crises in Greece and Spain, I've decided to keep my powder dry and await further price falls.
Twenty yield monsters
Although I've held fire on increasing my exposure to shares, I do agree with other investors that recent market falls have exposed some deep value, especially among the U.K.'s biggest listed companies.
In fact, for income-seeking investors wishing to play a long game, there are some remarkably attractive blue-chip "safe havens" out there right now.
To show you what I mean, I conducted a value trawl of the FTSE 100 on Thursday morning. Using a simple filter, I produced a list of 25 companies with market values of more than 2 billion pounds and dividend yields greater than 4.5% a year. I then weeded out five firms with low dividend cover or high earnings ratings to leave a "top 20" list of dividend giants. Here are these 20 yield monsters, sorted from highest to lowest dividend yield.
Value (billions of pounds)
Share Price (pence)
Legal & General
Vodafone (NAS: VOD)
Royal Dutch Shell (NYS: RDS.B)
GlaxoSmithKline (NYS: GSK)
Marks & Spencer
BP (NYS: BP)
Source: Digital Look, morning of May 17, 2012.
Big businesses mean big dividends
As you can see, these companies' market values range from more than 2 billion pounds (Drax) to 128 billion pounds (Royal Dutch Shell), so all are corporate giants.
Also, while their price-to-earnings ratios vary from 4 to 16.5, the average P/E for the whole portfolio is a mere 9.2. So these are not expensive shares, relative to the post-tax earnings they generate as a whole.
However, the main attraction of these big firms is their high, well-covered dividends. Their dividend yields range from 4.5% at CRH to a whopping 9.8% at Resolution. Overall, the average dividend yield (from investing 5% of our pot into each business) is an impressive 6% a year. What's more, at all firms but one, these regular cash payouts are well-covered by earnings. Dividend cover ranges from 0.7 times at Aviva (expected to rise above one this year) to a hefty 4.7 times at BP. Overall, the average dividend cover is more than two times earnings, which is a comfortable cushion.
To top it all off, this portfolio is less volatile than the U.K. stock market as a whole. Although individual betas (a measure of price volatility relative to the market) range from a dull 0.3 to a racy 1.7, the overall beta comes in at 0.9. Hence, the volatility of this collection of 20 shares has historically been lower than the London market.
In comes the income
While this appears to be a powerful portfolio for income, it does have one drawback: It is overly focused on a few market sectors and, therefore, is not terribly well diversified.
For example, it includes:
Four insurers (Aviva, Legal & General, Resolution, and RSA).
Four power/energy companies (Centrica, Drax, National Grid, and SSE).
Three retailers (J Sainsbury, Marks & Spencer, and Tesco).
Two pharmaceutical firms (AstraZeneca and GlaxoSmithKline).
Two oil giants (BP and Royal Dutch Shell).
Two more financial firms (HSBC and ICAP).
Telecoms Goliath Vodafone.
Irish cement firm CRH.
Defence contractor BAE Systems.
Hence, despite being spread across nine sectors, this portfolio has heavy exposure to some. Despite this concentration, you wouldn't need to put a gun to my head to make me buy this portfolio. That's because an investment of 1,000 pounds in each of these 20 businesses would pull in dividend income of 1,200 pounds a year (6% of the £20,000 total). What's more, this income would be tax-free for basic-rate taxpayers, thanks to the notional 10% tax credit attached to dividends.
In summary, this is the kind of approach I intend to take when building my new portfolio. Indeed, with its focus on income and safety first, I reckon that this 20-share family will thrash the wider market over the next decade.
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At the time thisarticle was published Cliff owns shares in GlaxoSmithKline. The Motley Fool owns shares in Tesco.Motley Fool newsletter services have recommended buying shares of Tesco, GlaxoSmithKline, and Vodafone Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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