Opportunities for High Dividend Yields in the U.K.    Bookmark and Share

Published Mon, 27 Aug 2012 09:00 CET by TopYields.nl

Investors in pursuit of high dividend yields have plenty of reasons to focus on the U.K. equity market. Currently, on average, U.K. stocks are paying higher dividend yields than U.S. stocks. For example, the FTSE All-Share index is paying a dividend yield of 3.62%, compared to a yield of just 1.5%, on average, for the U.S. broad Russell 2000 index. Even large-cap U.S. stocks in the S&P 500 index are yielding a mere 2.1% on average. On the other hand, U.K. stocks are yielding much more than government bonds. For instance, the U.K. broad equity market's yield is 140% higher than the yield on the U.K. 10-year gilt. Obviously, all this should put U.K. dividend payers on the radar of the U.K. and global income investors.

Still, income investors in the U.K. market have an opportunity to obtain even higher yields than the noted lucrative averages. There are several exchange-traded products and select high-quality stocks that offer distribution/dividend yields that can hardly be matched by investments of a comparable risk-return profile.

For example, in general, a good place to look for safe high-yield U.K.-based dividend stocks is the S&P U.K. High Yield Dividend Aristocrats Index, which consists of 30 highest-yielding U.K. stocks within the S&P Europe Broad Market Index. The S&P U.K. High Yield Dividend Aristocrats Index balances high dividend yield with dividend sustainability and growth. It includes only those companies that have dividends covered by earnings, with a maximum yield of no more than 10%, and the history of dividend hikes for at least 10 consecutive years. Investors can purchase the entire index in a form of an exchange-traded fund (ETF), SPDR S&P U.K. Dividend Aristocrats ETF. This ETF has an expense ratio of 0.3% per annum and boasts a distribution yield of 4.42%, with distributions made twice yearly.

Another ETF that tracks attractive dividend-paying stocks in the U.K. is the iShares FTSE U.K. Dividend Plus ETF (LSE: IUKD). This ETF tracks performance of the FTSE U.K. Dividend+ Index, which consists of the 50 highest-yielding U.K. stocks within the universe of the FTSE 350 Index (measuring the performance of the 350 largest U.K.-listed stocks by market capitalization). Almost a third of the ETF's allocation is in the financial sector, followed by consumer services and industrials. The ETF has an expense ratio of 0.4% per annum and a distribution yield of 5.21%. The fund makes distributions quarterly. However, please note that while this ETF has outperformed the broader equity market this year, since inception in 2005 it has markedly underperformed the broader market.

While ETF investing allows for diversification, investors can also focus on investing in individual dividend-paying stocks, especially those of high quality, with sustainable earnings power and dividend growth. For example, investors can choose from among the constituents of the aforementioned indices. Some of the recommended investments options are listed in the table below:

U.K. Dividend Yield Table

Moreover, dividend investors can follow the advice of the analysts at investment bank Morgan Stanley, who recently made a special screen to identify the best U.K. dividend stocks for the next two years. Looking for stocks with a high-return potential, investment safety, and a prospect of dividend growth, Morgan Stanley's analysts selected the best U.K. dividend stocks based on a high yield and dividend growth over the next two years; payout ratio below 75%; market cap above £3 billion, strong balance sheets with a debt-to-equity ratio below 30%; and free cash flow yield above 5%. Their screen identified the following stocks as the best dividend investment opportunities:

2013 Dividend Yield (estimated) Table

All of the aforementioned investments pay dividend yields in excess of the current rate of inflation, the average dividend yield on the broad stock market, and the benchmark government bonds. Moreover, all U.K. dividends are exempted from the U.K. withholding taxes. Therefore, the aforementioned dividend ETFs and stocks should be considered as attractive investments by prudent equity income investors.



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Stock name                      ISIN Last trade   P/E EPS Div PS Ex Div Date Payout Ratio Div Yield
BALFOUR BEATTY
P/E ratio of BALFOUR BEATTY on Google Finance
GB0000961622 152.90   61.7 2.5 14.10 Oct 09 2014 569 9.22
TESCO
P/E ratio of TESCO on Google Finance
US8815753020 8.30   16.3 0.5 0.74 Oct 30 2014 145 8.88
VODAFONE GROUP
P/E ratio of VODAFONE GROUP on Google Finance
US92857W2098 33.22   4.9 6.7 2.35 Jun 11 2014 35 7.07
TESCO
P/E ratio of TESCO on Google Finance
GB0008847096 173.00   16.4 10.6 11.29 Oct 30 2014 107 6.53
CATLIN GROUP
P/E ratio of CATLIN GROUP on Google Finance
BMG196F11004 536.50   6.1 87.1 31.50 Aug 20 2014 36 5.87
AMLIN
P/E ratio of AMLIN on Google Finance
GB00B2988H17 455.40   7.7 58.2 26.30 Sep 03 2014 45 5.78
CENTRICA
P/E ratio of CENTRICA on Google Finance
GB00B033F229 301.90   22.9 13.1 17.18 Sep 24 2014 131 5.69
VODAFONE GROUP
P/E ratio of VODAFONE GROUP on Google Finance
GB00B16GWD56 206.95   4.9 41.8 11.09 Jun 11 2014 27 5.36
CARILLION
P/E ratio of CARILLION on Google Finance
GB0007365546 331.80   13.8 23.4 17.60 Sep 03 2014 75 5.30
ICAP
P/E ratio of ICAP on Google Finance
GB0033872168 416.00   26.6 15.4 22.00 Jul 02 2014 143 5.29
ROYAL DUTCH SHELL A
P/E ratio of ROYAL DUTCH SHELL A on Google Finance
US7802592060 71.79   13.8 517.0 3.76 Aug 13 2014 1 5.24
ROYAL DUTCH SHELL-A
P/E ratio of ROYAL DUTCH SHELL-A on Google Finance
GB00B03MLX29 2232.60   13.8 160.6 115.04 Aug 13 2014 72 5.15
ROYAL DUTCH SHELL B
P/E ratio of ROYAL DUTCH SHELL B on Google Finance
US7802591070 74.67   0.0 0.0 3.76 Aug 13 2014 5.04
ROYAL DUTCH SHELL-B
P/E ratio of ROYAL DUTCH SHELL-B on Google Finance
GB00B03MM408 2309.00   0.0 0.0 115.04 Aug 13 2014 4.98
BAE SYSTEMS
P/E ratio of BAE SYSTEMS on Google Finance
GB0002634946 29.37   0.0 0.0 1.36 Oct 22 2014 4.63
TATE & LYLE
P/E ratio of TATE & LYLE on Google Finance
GB0008754136 604.00   11.7 52.1 27.60 Jun 25 2014 53 4.57
BAE SYSTEMS
P/E ratio of BAE SYSTEMS on Google Finance
GB0002634946 458.00   75.2 6.0 20.30 Oct 23 2014 338 4.43
PEARSON
P/E ratio of PEARSON on Google Finance
US7050151056 18.75   35.7 0.5 0.82 Aug 13 2014 156 4.34
PEARSON
P/E ratio of PEARSON on Google Finance
GB0006776081 1171.00   35.5 32.7 49.00 Aug 13 2014 150 4.18
ASTRAZENECA
P/E ratio of ASTRAZENECA on Google Finance
US0463531089 72.94   45.2 1.6 2.80 Aug 13 2014 174 3.84
ASTRAZENECA
P/E ratio of ASTRAZENECA on Google Finance
GB0009895292 4533.50   44.9 100.0 169.90 Aug 13 2014 170 3.75
BRITISH SKY BROADCAST
P/E ratio of BRITISH SKY BROADCAST on Google Finance
GB0001411924 882.50   11.1 79.3 32.00 Mar 26 2014 40 3.63
SAGE GROUP
P/E ratio of SAGE GROUP on Google Finance
GB0008021650 376.00   18.0 20.8 11.56 May 14 2014 56 3.07
RECKITT BENCKISER GROUP
P/E ratio of RECKITT BENCKISER GROUP on Google Finance
GB00B24CGK77 5255.00   20.0 259.0 137.00 Aug 06 2014 53 2.61
REED ELSEVIER
P/E ratio of REED ELSEVIER on Google Finance
GB00B2B0DG97 1025.00   21.0 48.2 24.95 Aug 06 2014 52 2.43
REED ELSEVIER
P/E ratio of REED ELSEVIER on Google Finance
NL0006144495 18.39   20.6 0.9 0.45 Aug 06 2014 51 2.43