Resident IFA Blog

There has been a lot of conjecture recently around what better approaches to take during the recent market volatility.

Now, I am not qualified to give individual share advice to my Clients in expediting my role as an IFA (Independent Financial Adviser), yet it dawned on me a long while ago that market volatility, especially drops, could be somewhat counter-balanced by holding high-yielding (Dividend-issuing) shares.

Of course, buying into an individual share is perceived as one of the riskier investments to make; when compared to a diversified portfolio of stocks or a professionally-managed collective investment fund.

The second use for high-yielding shares – as well as to potentially negate some market volatility – is to provide a return (income). However, companies can decide to withdraw their Dividends at any time, or reduce them (I.e. Lloyds Banking Group; TIDM code ‘LLOY’).

Thus, this approach will not always work. With, say, a decent savings account providing 2% net interest, you would need to at least match this with Dividend-bearing shares, hoping for no capital loss during the journey (otherwise eroding the effective return including Dividend).

Of course, there are companies such as National Grid (TIDM code ‘NG.’) who far out-perform this, recently issuing a 6.6% Dividend.

Last week, I read an article from Skandia which mentioned the ‘FTSE350 High Yield (HY)’ index. Apparently, the FTSE350 is broken into HY and a low-yield equivalent, in essence being the Value and Growth indices.

The most interesting statistics in the article were:

• During the Internet Bubble (2000-2003), the FTSE100 fell by almost 50%, whereas the FTSE350 HY fell by <14%.

• When Dividends were factored-in, you can substitute 42% and 5% for the above figures respectively…eye-opening.

• During the market recovery of 2003-2005, the FTSE350 HY continued to out-perform the FTSE100.

• Since then, however, the FTSE350 (Growth) has outperformed the FTSE350 HY (Value) by nearly 50%.

So, it seems that people have been hell-bent on investing for capital growth in the recent past. I wonder, though, if the figures might turn back towards parity or in favour of the FTSE350 HY? Boring & Steady might be the long-term play…

I have asked the guys at LSE to see if they can make more of these two newly-discovered (If only for me!) indices, at least adding Value and Growth information to the FTSE350 page so that Dividend investors can see those companies prospering and actively returning a share of profits to their shareholders.

Until next time…