Why stock market falls have a silver lining for income seekers

In a year that saw stock markets around the world turn into a sea of red, the FTSE 100 was exceptional only in being more unpopular than most.

In a year that saw stock markets around the world turn into a sea of red, the FTSE 100 was exceptional only in being more unpopular than most.

Its unpopularity can be gauged by its price – it is now down 10% year to date. At the same time, fund managers asked in the Bank of America Merrill Lynch survey have constantly rated UK equities as their least favourite asset class over the course of 2018.

A number of fears weighed heavily on the blue-chip index, Brexit uncertainty and fears of a potential Labour government led by Jeremy Corbyn being the cited more often. Neither seems unlikely to ease up anytime soon.

While the FTSE 100 price is down over 10%, real returns (including dividend payments) are slightly better, albeit still negative, at a loss of 6.8%. The point here is that the index is still made up of generous dividend payers, which presents an opportunity for investors.

The weakness of share prices, combined with the index set to pay out a record high of £93.7 billion in dividends, means that the FTSE 100 is now expected to have an attractive yield in 2019.

As Russ Mould of AJ Bell notes: “The autumn stock market sell-off has boosted the forecast dividend yield for the FTSE 100 to 4.9% for 2019. Such a fat yield looks extremely tempting compared to the Bank of England’s 0.75% base rate for cash and the 1.23% yield on the benchmark UK 10-year gilt.”

Similarly, notes Richard Hunter, head of markets at interactive investor, the FTSE 100’s current and anticipated yield is “a clear invitation to income-seeking investors who are being paid to wait for any recovery”.

 

Investors, however, should be cautious. As the table above shows, the expected dividend cover for the index’s highest yielding shares is only 1.21 times.

That’s well below the ideal level of 2 times, leaving the companies in the index vulnerable to and external shock and downturn in revenue.

For the whole index, dividend cover is slightly better, expected to be 1.79x. This, notes Mould, is a four-year high for the index, which has seen its cover figure remain below 2x since 2014.

 

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