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Crisis sends investors searching for high yields

WITH no end to the euro area crisis in sight and data on the global economy similarly inconclusive, we feel market volatility is likely to remain high.

WITH no end to the euro area crisis in sight and data on the global economy similarly inconclusive, we feel market volatility is likely to remain high.

If this is the case, then so-called income stocks are likely to stay popular with clients.

The current appeal of higher yielding equities is easy to understand. A significant number of companies are now yielding more than the relevant benchmark 10-year Government bond.

More interestingly, the dividend yield of a significant number of companies is higher than the yield paid on their debt. This gives some idea of the valuation attraction of equities as a whole, and in our view high-yielding equities in particular.

On top of this, at this stage of the cycle, the companies with higher payout ratios relative to the rest of the market tend to come from the less cyclical, more defensive sectors with relatively secure cashflows, such as utilities, telecommunications and healthcare.

These sectors tend to allow investors to opt out of any significant macroeconomic bets, which is an attractive trait in the current environment.

Even when one removes the need for such stalwart qualities, higher yielding stocks still look a sound way to gain exposure to the equity market.

High-yield equity indices, both in Europe and the US, have tended to outperform their respective benchmark indices and provided better risk-adjusted returns over the last 10 years. We also prefer developed market equities, in particular those in the US, to emerging market shares.

We still wait to raise our emerging-market exposure, but via cheaper developed market stocks rather than expensive local equities.

Since 2010 we have produced a quarterly publication for clients called Gaining Exposure to Income Stocks, which contains companies that pay superior dividends and are able to keep paying and increasing them.

As we have said before, equity markets are going to be torn between the bulls and the bears until there is confirmation that this soft patch in economic data is just a mid-cycle pause for breath. In the meantime, tilting an equity portfolio towards stocks with a decent yield is one way to shelter from some of the potential volatility ahead.

:: Andrew Miller is regional office head of Barclays Wealth in Newcastle.

 

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