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  
VODAFONE GROUP
P/E ratio of VODAFONE GROUP on Google Finance
GB00B16GWD56 217.05   3.2 67.5 19.16 Nov 20 2013 28 8.83
VODAFONE GROUP
P/E ratio of VODAFONE GROUP on Google Finance
US92857W2098 36.54   3.2 11.3 3.02 Nov 20 2013 27 8.26
BAE SYSTEMS
P/E ratio of BAE SYSTEMS on Google Finance
GB0002634946 26.70   0.0 0.0 1.61 Apr 17 2014 6.03
PEARSON
P/E ratio of PEARSON on Google Finance
US7050151056 17.90   29.5 0.6 1.07 Apr 02 2014 176 5.98
CATLIN GROUP
P/E ratio of CATLIN GROUP on Google Finance
BMG196F11004 520.50   8.5 60.5 31.00 Feb 19 2014 51 5.96
AMLIN
P/E ratio of AMLIN on Google Finance
GB00B2988H17 445.30   7.5 59.1 26.00 Apr 16 2014 44 5.84
ASTRAZENECA
P/E ratio of ASTRAZENECA on Google Finance
US0463531089 66.86   33.9 204.0 3.80 Feb 19 2014 2 5.68
ICAP
P/E ratio of ICAP on Google Finance
GB0033872168 412.20   220.7 1.8 22.00 Dec 31 2013 1209 5.34
BAE SYSTEMS
P/E ratio of BAE SYSTEMS on Google Finance
GB0002634946 392.00   75.2 5.2 20.10 Apr 16 2014 389 5.13
TESCO
P/E ratio of TESCO on Google Finance
GB0008847096 292.40   12.2 23.7 14.76 Oct 09 2013 62 5.05
CENTRICA
P/E ratio of CENTRICA on Google Finance
GB00B033F229 344.90   18.8 18.3 17.00 Sep 25 2013 93 4.93
ROYAL DUTCH SHELL A
P/E ratio of ROYAL DUTCH SHELL A on Google Finance
US7802592060 75.18   14.5 520.0 3.60 Feb 12 2014 1 4.79
BALFOUR BEATTY
P/E ratio of BALFOUR BEATTY on Google Finance
GB0000961622 299.80   118.6 2.5 14.10 Oct 09 2013 569 4.70
CARILLION
P/E ratio of CARILLION on Google Finance
GB0007365546 376.90   16.1 23.2 17.50 Sep 04 2013 75 4.64
TESCO
P/E ratio of TESCO on Google Finance
US8815753020 14.66   12.2 1.2 0.68 Oct 09 2013 57 4.64
PEARSON
P/E ratio of PEARSON on Google Finance
GB0006776081 1060.00   29.3 36.3 48.00 Apr 02 2014 132 4.53
ROYAL DUTCH SHELL B
P/E ratio of ROYAL DUTCH SHELL B on Google Finance
US7802591070 80.23   0.0 0.0 3.60 Feb 12 2014 4.49
ASTRAZENECA
P/E ratio of ASTRAZENECA on Google Finance
GB0009895292 3960.00   31.1 122.0 176.33 Feb 19 2014 145 4.45
ROYAL DUTCH SHELL-B
P/E ratio of ROYAL DUTCH SHELL-B on Google Finance
GB00B03MM408 2389.00   0.0 0.0 105.75 Feb 12 2014 4.43
ISHARES FTSE UK DIV PLUS
IE00B0M63060 0.00   0.0 0.0 0.00 4.25
TATE & LYLE
P/E ratio of TATE & LYLE on Google Finance
GB0008754136 656.00   12.7 51.5 26.60 Nov 20 2013 52 4.05
ROYAL DUTCH SHELL-A
P/E ratio of ROYAL DUTCH SHELL-A on Google Finance
GB00B03MLX29 2240.00   14.5 154.2 89.96 Feb 12 2014 58 4.02
BRITISH SKY BROADCAST
P/E ratio of BRITISH SKY BROADCAST on Google Finance
GB0001411924 900.00   15.8 56.2 31.00 Mar 26 2014 55 3.44
REED ELSEVIER
P/E ratio of REED ELSEVIER on Google Finance
NL0006144495 15.10   16.7 0.9 0.43 Aug 07 2013 48 2.85
REED ELSEVIER
P/E ratio of REED ELSEVIER on Google Finance
GB00B2B0DG97 885.00   17.6 50.1 24.60 Aug 07 2013 49 2.78
RECKITT BENCKISER GROUP
P/E ratio of RECKITT BENCKISER GROUP on Google Finance
GB00B24CGK77 4955.00   20.6 239.0 137.00 Feb 19 2014 57 2.76
SAGE GROUP
P/E ratio of SAGE GROUP on Google Finance
GB0008021650 411.00   110.6 3.6 11.32 Feb 12 2014 311 2.75


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