REINVESTED dividends are the main source of long-term equity returns. And a high divdend yield is a big argument for buying equities. But caveat emptor. When an individual stock has a high yield, that is a sign that the market expects the future dividend will be cut. The same can be true of the overall market.
That looks to be true for Britain’s FTSE 100 at the moment. The dividend yield on the FTSE 100 is 4.2%. That makes equities look a bargain compared with the 1.57% payable on 10-year gilts. But that yield is at risk. A recent column showed that around 70% of all the dividends paid in the British market came from just 20 stocks.
The best measure for working out whether divdends are at risk is to look at the cover; this compares…Continue reading