We have had a few updates and results from some well known high yielding UK shares this week which may well be held by yield hungry investors. The Companies I'm thinking of are Centrica (CNA), Talk Talk (TALK) & Vodafone (VOD). Now I mentioned Vodafone last week in a post where I explained why I don't hold it, which you can read here if you missed it.
Now as it happens they had a reasonable update and the new CEO seemed to be indicating a commitment to maintaining the dividend, which led to a relief bounce in the share price, as I suspect the market was rightly worried about the possibility of a dividend cut here. As for the other two I'll not go into detail on their trading updates here, as if you're in them I'm sure you will have read them and as it stands, I wouldn't recommend buying them given their poor scores in the Compound Income Scores.
Which is the whole point of this post, to point out how the Scores have helped me to avoid these high yielding losers and have helped direct me towards better performing yield stocks with growing dividends which I believe is the way to go. Don't take my word for it, take a look at the performance of the Compound Income Scores portfolio in comparison to these three and the broader markets too in the charts above.
If you have been holding stocks like these and are getting fed up with losing capital and seeing your dividends cut in some cases, then do feel free to check out the Compound Income Scores to see how they can potentially point you in the right direction towards growing, winning income shares and away from non growing, losing income shares.
The latest Scores will be out tomorrow, so if you'd like to try them out free for a few weeks, then don't delay and sign up today, as you won't have to pay until the third week of December. If you find they are not for you and you cancel before the middle of December then you won't have to pay anything, now I can't say fairer than that can I? So what have you got to lose, apart from a few losing high yield shares from your portfolio?
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On the face of it Vodafone is a large well known business with a decent position in the mobile phone market & has been building up an offering in broadband etc. too. On the back of this it pays a dividend of around 13p per share which at the current share price of 144p means it yields an amazing 9%.
Sounds great, what's not to like? Well quite a bit actually which is why I've not held it for a while now having sold out at prices over 200p between 2014 & 2017. The reasons for this were:
As I mentioned I think the big yield is more of a danger signal and this can be assessed by looking at the dividend cover by earnings and cashflow and on this measure Vodafone scroes in the bottom quartile i.e. the lowest 25% of the nearly 600 companies that are included in the Scores. To be fair it does have some positive attributes like the value it is offering thanks to the yield and an EBIT/EV yield of nearly 6% which puts it in the top quartile on that measure, as it is for financial security too, so it is not all bad.
Having said that though whatever you might think about mobile phones and telecoms as a business it does not score well in quality terms as they make low returns on all that capital they have to plough into buying mobile licences and investing in towers and fixed networks etc. While the margin they make is OK rather than spectacular as mobile is quite a competitive business these days rather than a licence to print money. So again it scores in the bottom quartile on that measure too. Added to that it has also been seeing downgrades to their earnings forecasts since the summer which are much worse than the average stock so it is also you guessed it bottom quartile on that measure too, in fact it is worse than that it is in the bottom decile or lowest 10%.
Now while the shares do look oversold and offer the high yield I'm still not tempted to buy back into this one given the above puts it on an overall Compound Income Score of 19, where 100 is the best, so once again it is bottom quartile overall despite the value and financial security. If that wasn't enough the other thing I monitor with the Scores, although it is not in the overall score, is the price momentum as winners tend to carry on perfroming and losers tend to carry on underperforming. Hence the investing axiom that you should run your winners and cut your losers. I suspect the risk here is that they will continue to drift and the risk is that at some point they may be forced to cut the dividend, given the cover and on going capital expenditure requirements, which doesn't usually go down well with investors who are mainly in it for the yield.
So there you go a quick example of how you could use the Compound Income Scores to quickly assess a company and see how it compares with hundreds of others and then potentially find more attractive candidates. I hope you might have found this post useful if you do hold Vodafone shares and if you would like to learn more about the Compound income Scores and see how you could see how your stock holdings measure up, then please see the link in the navigation menu on the site or click here if that's easier for you. mind how you go and safe investing.
Today we have seen a small negative print for the latest CPI figures in the UK, although I seem to recall the RPI went negative in 2008/9 so it is not the first time we have seen this in recent years. However, personally I am not getting too worried about that becoming entrenched as you have to go back to the 1920's to 1930's to see the last real period of sustained deflation in the UK.
I would say that we could have faced a similar depression type scenario and deflation in the last few years if the authorities had not learned from history and cranked up the printing presses this time around with the various Quantitative easing measures etc. However, it does mean we are now in uncharted waters, with huge amounts of debt still outstanding and economies generally being sustained by cash being pumped out by central banks and competitive beggar thy neighbour currency depreciation.
Of course it could be that the Central Banks have just delayed the day of reckoning and the word economy and markets could eventually come crashing down under the weight of all this debt as deflation takes hold. In my view though inflation is more likely to be their chosen route to get rid of the debt over time, which they did quite successfully for a few years in the UK after the 2008/9 recession. So it remains to see if the current deflationary episode turns out to be temporary as Governor Carney suggests (although the Banks forecasting record is pretty poor) or if a deflationary debt spiral is taking hold.
No point worrying about these things too much in the short term, so I'm going to continue to invest in the least bad asset class as far as I'm concerned - equities. I believe that will be the best way to protect my capital and income from the ravages of inflation over time, although you have to be prepared to accept some volatility in your capital and income. In the long run we're all dead, but in the meantime I think a decent income producing equity portfolio should do the job for me.
If however you believed that deflation was more likely then high quality fixed income and even cash may serve you better as your purchasing power would increase against the falling prices, which might be bad for corporate profits and earnings - witness the food retailing sector recently.
Talking of corporate earnings I see we have had final results from one of the UK's major companies and dividend payer - Vodafone (VOD). They themselves continue to struggle with falling prices and the need to invest in their networks and other technologies for the future. Nevertheless they have delivered a 2% increase in the dividend this year taking it to 11.22 pence to give a yield of 4.9% at the price of 229 pence at pixel time. Within the statement they say they are also planning to increase the payment annually as a sign of their confidence in future cash flow generation, although they don't say by how much, although I see forecasts suggest another 2% or so which beats inflation at the moment. In addition this does at least compare favourably with the other major UK stocks like RD Shell and GlaxoSmithKline who have indicated flat dividends in the next few years, but then they offer yields of around 6% and 5.5% respectively.
So while Vodafone does not score well on the Compound Income Scores with a score of just 2 - I think this is probably distorted to a certain extent by some of the figures being depressed by all the restructuring and corporate changes like the Verizon demerger for example. Therefore in this case, given their position in the European mobile and fixed line markets, I would do a human over ride and suggest that it would be OK as part of a more broadly based income portfolio, but as I always say you pay your money and take your choice and you should do your own research. Or stick to a cash ISA paying 1 or 2% and see how you get on.