Eoin Treacy's view Following the kind of contraction experienced by stock markets over the last two weeks, investors typically develop a new found respect for yield. During a persistent uptrend, when price appreciation more than makes up for the absence of an attractive yield most investors are not overly worried about total return. However, when prices fall abruptly the attractions of a reliable dividend become all too obvious. The current pullbacks have resulted in yields rising as prices have declined. As outlined in the response to the email below some French utility-like companies now have yields in excess of 10%. However, the question following such an abrupt decline will always be whether the dividend can be sustained?
In such an uncertain environment, it is difficult to know which companies will maintain their dividends. Members of the Collective will know more about some individual companies than we do and I have no doubt subscribers would welcome additional feedback on the fundamental prospects for high yielding equities.
I thought it might be instructive to first review shares which have a long history of not only sustaining but increasing dividends. The S&P500 Dividend Aristocrats have been increasing their dividends annually for the last 25 years. In May the average yield for the constituents of the S&P 500 Dividend Aristocrats Index was 2.63. It is now 3.06%.
The S&P Europe 350 Dividend Aristocrats have been increasing their dividends annually for the last 10 years. At the end of May the average yield on the constituents of the S&P Europe 350 Dividend Aristocrats Index was 3.33%. It is now 4.13%.
In the USA, Office Equipment specialist, Pitney Bowes has fallen to test the lower side of its large trading range and currently yields 7.86%. While it has yet to show conclusive evidence that it is bottoming, the yield is becoming increasingly attractive which should help to cushion the decline somewhat.
McDonalds remains in a consistent medium-term uptrend and yields 2.81%. It is reverting towards the mean but the uptrend can continue to be given the benefit of the doubt in the absence of a sustained move below $80. Yum Brands is not a dividend aristocrat but yields 2.02% and has a solid record of increasing dividends. It has pulled back below the 200-day MA and needs to sustain a move back above it to confirm a return to demand dominance.
In Europe, Abertis Infraestructuras yields 5.66% and has pulled back to the lower side of the almost 3-year range. It is deeply oversold in the short-term and needs to demonstrate that it is in the process of finding support, but has so far held above the 2010 low.
In the UK, Scottish & Southern Energy has pulled back to test the upper side of the base and currently yields 6.23%. An upward dynamic would confirm at least short-term support in the region of 1200p.
I will continue this review of higher yielding shares tomorrow with a look at energy trusts and partnerships.