Investors should not write off the UK stock market in their search for income, with companies such as GlaxoSmithKline, Vodafone and FirstGroup boasting high dividend yields and strong balance sheets, according to Killik & Co.

The stockbroker has identified 10 hot stocks that have a dividend yield of more than 3.8 per cent which could be ideal for savers affected by the withdrawal of NS&I savings certificates or BP shareholders mourning the loss of their dividends.

‘Even though a number of companies have cut or reduced their dividends over the last couple of years, the prospective yield of equities, even after adjusting for the suspension of payments by BP, is currently around 3.6 per cent,’ says Paul Killik, senior chief executive at Killik & Co.

‘This is well ahead of its 30-year average (around 3.1 per cent) and returns on cash and UK government bonds.’

The firm recommends Vodafone (6.7 per cent dividend yield) and First Group (6.4 per cent). It also names AstraZeneca, British American Tobacco, GlaxoSmithKline, Centrica, Pearson, Sainsbury, Halfords and Melrose as having decent dividend yields of between 3.8 per cent and 5.5 per cent as well as good financial strength and cash flow.

Killik says equities can provide ‘an attractive source of income for investors willing to accept a degree of risk’.

He also highlights Invesco Perpetual Income, Law Debenture and Veritas Global Equity Income as solid income funds.

Meanwhile Andrew Moffat, manager of CIS UK Income with Growth Trust, says the BP dividend cancellation shows that some income funds have become too dependent on a few blue chip stocks. He believes this could revive investor appetite for equity and bond funds as they are more flexible and generate yield from different sources. ‘The UK equity & bond income sector allows a more liberal approach to stock picking,’ Moffat comments.

‘Due to their greater diversity of income source, these funds have greater insulation to such shocks.’