Saw the Q4 Dividend Monitor Update from Link Asset Services yesterday. This confirmed previous projections that UK dividends were down last year by around 44% or 38% underlying if you exclude special dividends. More significantly they updated their best case scenario for dividends in 2021 in light of the latest lock down. Within the document which you can see a summary of and obtain from here they said:
Currently with FTSE trading at 6740 that leaves us pretty much in the middle of my suggested range. If however you are of a more bullish persuasion then if the FTSE 100 should trade down to or on the basis of a 3% yield then it might be possible for it to trade between 7800 and 8600 or thereabouts, but I wouldn't bet the house on that happening.
There you go steady as she goes on the dividend front but slightly depressing that dividends might not now bounce back as quickly as previously expected and that it might take until 2025 for the market to get back to where it was in 2019 in income yield terms. It is also worth noting that the Link report suggests that the UK market despite cuts from some of the larger paying stocks and sectors last year, still seems to be prone to concentration risk in terms of where the income is generated. Worth bearing in mind if you are investing in a UK tracker fund.
Personally I'd expect to get back to 2019 levels of income much sooner than that given that our portfolios avoided the worst of the dividend cuts by not being as exposed to concentration risk as the headline indices and thanks to our investment trust holdings. Mind how you go out there and in the market.
"Life is a roller coaster just got to ride it" Ronan Keeting
Well that would have been good advice if only we had been able to live our lives last year, but as we all know we were stopped from doing that in the main by Covid-19. In terms of Stock Market investments it was certainly a roller coaster ride as a record breaking bull market, in terms of duration, finally came to an end. This was then followed by a seemingly record short bear market (certainly in the US) or does that mean it was just a correction? While in the UK we have continued to struggle on back below 7,000 on FTSE as our old economy type stocks and sectors and lack of technology champions in the main took their toll on the index.
Meanwhile we finally managed to leave the EU and agree some sort of on going trading relationship at the last minute as is always the EU way, but as ever time will tell as to how good or bad that might turn out to be. Unbelievably I see that people are already calling for us to re-join even though we have only just left and finally agreed some sort of trade deal.
So early signs of a neverendum mentality taking hold already until remainers / EU get the answer they want I guess. Any way I'm sure you are all familiar with and fairly fed up with all these issues - so I'll move on.
Compound Income Portfolio - Performance
If anyone is interested in this, it managed to outperform the FTSE All Share (which I use as a benchmark) again this year making it 5 years out of 6 now since inception in April 2015 or 4 out of 5 years if you count just full years. As this was set up to try and demonstrate if the Scores had any merit in picking outperforming stocks, I think an 80% or so success rate might be some evidence that they do, but as they say the past is not necessarily a guide to the future.
Having said that though the numbers this year are to be honest a little underwhelming in absolute terms as the CI Portfolio produced a total return of -1.26% versus the -9.8% from the FTSE All Share, although that is still a decent 8.55% out performance. This came as the portfolio produced a 6.01% return in December versus the 3.86% from the FTSE All Share, thereby clawing back just over 2% or around 1/3 of the under performance it saw last month in the vaccine inspired rally.
Since inception the CI Portfolio has just about doubled with a 99.84% total return or 12.8% per annum which compares to the 22.79% or 3.64% total return from the FTSE All Share. See also the graph on the website under the portfolio menu or at the end of this piece for comparisons with the Mid 250 and Small Cap Indices as well as the All Share. I put these on there as the portfolio has tended to have an above average exposure to these out performing part of the market, which will have accounted for some of the performance differential. For example at the end of the year the portfolio was split roughly 50/50 between FTSE 100 stocks and Mid 250 + Small Cap stocks (including AIM).
At the year end I also like to check how the CI Portfolio has done versus widely available pooled funds to see if I'd be better off putting more of my money into those type of vehicles. This year while the returns were not that great they still compared favourably with the UK Equity Income sector where its returns would have put it 5th out of 85 funds and 5th out of 26 in the UK Income Investment Trust sector. While over 3 and five years it has substantially outpaced all of the funds in both of these sectors. So even though the returns were a bit underwhelming in this unusual year I'm satisfied that the Scores are still doing a good job compared to pooled fund / index alternatives.
So I shall continue to use them in helping me to identify and select suitable Companies to help me achieve my investment objectives. The Scores will also continue to be available to subscribers' for a modest fee if they should like to use them to help them with their investing too. A table showing the total returns from the CI Portfolio and the FTSE All Share over the last 1,3 & 5 years is presented below and you can see the full table of returns via the Portfolio menu on the site.
Out of interest I took a quick look at how the Portfolio would have performed if I had left it untouched from it's positions at the end of March & April and it appears that the returns were around 5 to 8% better as a result of the trades that I did subsequently. So not bad for a monthly screening process, although this year was one in which it probably paid to be even more aggressive with your portfolio as evidenced by some of the exceptional returns I've seen reported. Rightly or wrongly I tended to focus on those businesses that could survive and manage their way through all this as it seemed that vaccines might have taken a long time to arrive. As it happens they managed to come up with those in double quick time so recovery plays then came to the fore even more.
This threw up three potential sale candidates this month, based on how they score in the Compound Income Scores. Of these I decided to hang onto Sage (SGE), a fairly recent addition to the portfolio, which has taken a bit of a hit as they are having to invest to stand still as it were as they transition to a software as a service model. Given it is a high return business you'd want them to reinvest if they can, but the wrinkle here is that they are having to invest to update / keep up with the competition. Nevertheless I felt that they still looked reasonable value on an EBIT/EV Yield basis & offer a well covered 3% Dividend yield, even if the PE doesn't look particularly cheap at around 24x.
Another high quality business that looked more of a sell on valuation grounds was Auto Trader (AUTO) which as well as a high rating has seen some substantial downgrades and the car market in the short term still seems to be quite challenged. Thus I let it be sold as per the process but personally feel a bit mixed about it as the valuation certainly feels expensive but it is a high return moat type of business that one would probably want to hold for the longer term. Having said that though I felt the same back in October last year when the process had me sell Avon Rubber at £43.40 due to a poor score based on high valuation and poor earnings trend too. So it will be interesting to see if Auto Trader crashes too on any future disappointment given the valuation. As this post is already getting quite long and taking longer than I thought it would, I'll move on. Subscribers though can see the full details of this and the other sale plus the two new stocks that replaced them on their files as normal.
Brief Economic / Market Outlook.
After such an exceptional year the consensus seems to be that we are through the worst and that some kind of economic recovery is at hand despite the fact that we seem to be entering another National lock down in effect in the short term. The roll out of the vaccines thus far is encouraging investors to look through that and anticipate a V-shaped recovery as all the pent up demand and cash that may have built up in some peoples bank accounts is released as and when we get back to some kind of normality.
While the initial recovery might well be quite perky on the basis of pent up demand and the sod it factor as we hopefully eventually emerge from the grip of the virus, I do worry a bit about the medium / longer term. That's mostly due to the level of debt to GDP around the world, which while it may be manageable if central banks and governments engage in yield curve / financial repression, the conventional wisdom is that debt at these levels is likely to prove to be a drag on growth in the medium term (like Japan as I mentioned last month).
I guess governments might continue to print and spend to offset those effects but it is above my pay grade to forecast where that might all end, although quite a few are expecting a pick up in inflation as a result this time around, which might offer governments a way out from their debt traps, perhaps.
In terms of dividends, as previously discussed and as I'm sure some readers are painfully aware of, these have been cut substantially this year with the UK dividend base expected to be down by around 40 to 50%. Having analysed the dividend flows on the Compound Income Portfolio is seems that the total income received this year was down by 30% year on year suggesting that some of the existing holdings and the changes that were made along the way have helped to lessen the effects of the cuts. So some evidence that they help one to select dividend paying stocks that might be more robust than the average.
That represents a yield of about 2.3% on the average portfolio value for the year which is somewhat lower than that of previous years but not that surprising in the circumstances and also as I have relaxed my value constraints somewhat this year and ran winners on higher valuation more. Based on forecasts the portfolio is expected to generate a yield of 4.2% with some strong dividend growth forecast. While in PE terms it is on 13.7x with an EBIT/EV Yield of 8%, so it looks to be offering decent value and growth on the basis of current forecasts. Again subscribers can see the full details of the portfolio in their Scores file.
In terms of the UK market when Link asset service last provided an update in Q3 they suggested that they thought dividends in the UK could recover by between 6% and 15%. While the FTSE ended the year at 6460.2 and offered a yield of 3.65% to give a dividend base of 235.79 index points. So I thought I would update my FTSE Dividend ready reckoner and see what it looks like if we assume those dividends could remain unchanged or grow by up to 15%. For the bulls I have also added a 3% yield column to see how far we could go if investors really get carried away and bid the market up and consequently down to a historically toppy level of a 3% dividend yield.
Outside of that I suspect that a 3.5% to 4% range is more likely to pertain this year suggesting a trading range for the FTSE of potentially between about 5900 - 7747 or say 6,000 to 7,500 if you wanted to tighten that up a little by looking at the chart from the beginning of this post and where likely support and resistance might come in. Indeed on that basis, while I wouldn't be surprised to see FTSE hitting or exceeding 7,000 again at some point this year, although technically it looks like there is a lot of over head resistance in the 7000 to 7700 range. It seems therefore that we might have to wait another year for the FTSE to surpass its 1999 high. At least it means if it should make it up into that range then we might be able to look forward to 10 to 15% returns this year to make up for last years disappointing returns from the UK market as a whole.
Summary, Outlook, Conclusion & Personal Note.
So very much a year to forget in terms of what happened to our lives and how the stock market performed in the UK at least. Obviously within that and globally there were many threats and opportunities thrown up so congratulations if you manged to navigate that and make decent returns & hats off to you. Equally if you lost some money, don't get too down about it but put it down to experience and try and learn from it I guess.
In terms of economies and markets the consensus seems to be expecting economic recoveries on the back of the vaccine roll out, but that may be tempered by the on going 2nd or 3rd waves and associated lock down restrictions, but hopefully we might be out the other side of all that by the summer, perhaps. Heaven forbid that the new variant of the virus should turn out to be resistant to the vaccines or that they should turn out to have more serious side effects than expected. If either of those came to pass I suspect all bets would be off.
On the market side of things the US market is generally perceived to be expensive (hasn't that been the case for a few years now?) but seems to carry on regardless so far. The flip side of that is that some other developed markets like Japan and the UK in particular look cheap, while emerging markets are widely tipped to do well along with commodities.
Whatever or however you decide to approach things this year may I wish you good fortune in the markets and good health for you and your families and loved ones and my deepest sympathies if you or someone close to you have been hit by Covid in the last year.
Talking of Covid I'm pretty sure that both my wife and I had it back in March before the lock down started and before it was widely known about. Fortunately being fairly fit and healthy (touch wood) 50 somethings we managed to come through it pretty quickly after a few days
of feeling unwell and fortunately did not need any medical intervention. Our planned trip to Berlin at Easter got cancelled and we didn't get to go away at all last year - what a drag.
On the portfolio front across the piece with our overall more broadly diversified asset mix we did at least manage to increase our net worth by 1.5% so thereby just about maintaining the real value of our assets. I should probably say more about longer term compounding and rates of returns but that is probably the subject for a post in itself as this one is already rather long.
For the income side of things my boring diversified stock investing approach together with the use of investment trusts helped to protect us from the worst of the dividend cuts this year. It was also helped by redeploying most of the cash buffer that we'd built up in 2019 during October and November after NS&I cut rates to zero and the market was having a second leg down before the vaccine news broke.
As a result our income was "only" down by about 9% year on year so not great, but not too bad in the circumstances and we can easily live with that. So while we didn't manage to increase or maintain that in real terms this year it does still leave it well up in absolute and real terms since we started full time investing for a living in 2009. So despite this somewhat trying year we have still managed to achieved my objective of growing our capital and income in real terms over that time frame. I still think that accessing quality companies with with good yields and the prospect of dividend growth is still a good way to try and achieve that, although of course others will have their own ideas.
So we literally live to fight another year having survived Covid and the roller coaster ride in the market last year. Here's to hoping that 2021 might be a better year all round, but so far it has not started that well with another national lock down, but perhaps we might get back to some sort of life by Easter or the Summer at the latest and maybe we might even get to travel somewhere too thereafter if we're lucky. Thanks for reading, you deserve a medal if you got this far and sorry for being so boring, take care & good luck for the year ahead.
Well November turned out to be quite a month to say the least. The fantastic news that a vaccine for the Corona virus had been very effective in tests prompted a record monthly rise in the UK stock market with most of the main indices providing total returns of around 12.6 to 12.7%. While Small caps again led the way following on from them moving above their moving average last month and thereby turning bullish. Thus this month they managed a +15.1% total return.
These moves also prompted a sharp rotation from previous quality / growth / defensive winning names towards low quality / challenged / recovery under performing names in the main, as investors anticipate a quicker return to normal and a more rapid recovery than hoped for in those sectors most afflicted by the virus. Now I'm sure you are familiar with all that by now so I'll move on.
Market Timing Indicators.
Unsurprisingly, after such a large move up in the market in the month, these have all moved above their longer term moving averages. As a result they are giving a positive signal that one should be more positive on and invested in the market. This is backed up by the US Unemployment rate which is used as a back up economic signal to judge whether to pay attention to the signal or not. This has also, somewhat surprisingly, moved down below its moving average, which is bullish, although it remains to be seen if the second wave or the vaccine disrupt or reinforce that trend.
Within that the main indices are now about 6-7% above their trend which is towards the upper end of where they have got to in the past. While the stronger performing Mid and Smaller Cap indices are 12.3% and 17.6% above their moving averages which is a record amount in the six years or so since I've been compiling these indicators. So that might suggest that the run up in Mid and Small cap names has perhaps gone a bit too far in the short term perhaps? Or maybe they just take a bit of a breather while the larger stocks play catch up, although you would have thought in these circumstances the moves might have been the other way around. In addition in the short term, after such a strong move, it might not be unusual to see some mean reversion on the back of profit taking perhaps.
The swing factor in whether this comes to pass might be the binary BREXIT deal or no deal outcome. Press reports seem to suggest that a deal was possible this week, although it is looking as though that could even extend into next week before a key EU summit on 10th December. My best guess is that a deal will be done at the last possible minute as that is the way the EU seem to operate in negotiations with 11th hours agreements often coming at the last moment.
Also it is noteworthy that the Portfolio since the March low to the end of November has returned 27.3% while the market has provided a total return of 16%. So on this occasion the Market Timing indicators have failed to add any value and indeed if one had traded out and were now looking to get back in you'd have also have incurred significant fees and spreads too in addition to missing out on the subsequent recovery. Thus this tends to confirm my suspicion that market timing is a bit of a mugs game and that it is generally better to remain invested and benefit from time in the market. Provided of course you can stomach the downs as well as the up and not panic out at the bottom.
To be fair these type of timing indicators did work well in the 2008/9 GFC as Central Banks were a bit more tardy in responding that time around. On this occasion they were very quick to respond and pump in liquidity which facilitated the turnaround in double quick time. It does of course leave the US market in particular looking particularly extended in terms of its valuation at this early stage of the recovery unless that can surprise dramatically to the upside in terms of its effect on Company profits and earnings.
On the back of that I'll probably stop writing the timing indicators up on here on a regular basis. I may however keep the data going and mention them if it seems significant in the future in terms of the signal. As a result of that I'll be keeping the Compound Income Portfolio still mostly fully invested going forward from here
Compound Income Portfolio.
It was also a positive month for the portfolio, although sadly not to anywhere near the same extent as the +12.7% total return from the FTSE All Share which I use as a benchmark. Indeed in that context the +6.8%, while great in absolute sense was perhaps, a little disappointing and not even a record, as the Portfolio has done better than that on a monthly basis on a few occasions over the years.
Nevertheless it is worth seeing that in context as the Portfolio had outperformed the index since the March low by producing +18.6% versus +3.2% for the FTSE All Share to the end of October. Thus the portfolio in November gave back around a bit over a third of its out performance since the low. As a result the Compound Income Portfolio has year to date produced -6.86% versus the -13.17% for the FTSE All Share. Since inception the portfolio has returned +88.51% or 11.84% per annum which compares to +18.22% or 3% per annum from the FTSE All Share.
Quantitative Factors & the Growth/ Quality versus v Value debate.
This doesn't come as a surprise to me as the process is designed to identify and target quality growing shares with robust finances and ideally supported by improving prospects in terms of estimate revisions. Whereas the winners as a result of the vaccine news were the precise opposite of that i.e low quality, loss making in some cases and with poor balance sheets that had been heavily downgraded. Though if users of the Scores were so minded to make that switch they could have identified suitable candidates by just looking in the lower quintile of the Scores rather than the top quintile as usual!
As someone who has managed quantitative driven portfolios both professionally and personally, this move comes as no surprise to me. Indeed at turning points in the market like this quantitative factors tend to stop working for a short period while the buy crap / recovery stocks is going on before the factors that the model taps into reassert themselves in the longer term.
The monthly screening process does also not lend itself to that and I felt disinclined to throw out the process and charge into recovery plays or skate to where the puck is going to be as one big fan of crap stocks likes to say on Twittter! Sure if you are more of a trader and looking to make rapid short term gains then you will have needed to be buying crap and all those bombed out recovery plays hit by the virus. So congratulation to you if you have managed to do that. Personally as I'm looking to grow and compound my assets and income I still believe that buying and holdings quality stocks for the long run is probably a better way to go in my view, but each to their own.
Now I know that buying quality has become quite a trendy view in recent years after the success of Terry Smith and Nick Train with strategies based on that view. Indeed there has been a bit of a debate before the recent vaccine news about growth versus value and some even declaring the death of value investing as a major value investor threw in the towel and closed their fund in an echo of Tony Dye being sacked PDFM at the height of the dot com bubble. So the vaccine news or V-day was the catalyst for a switch back towards bombed out value stocks as the valuation differentials which had been stretched to the extreme snapped back the other way & previous momentum stocks cratered and previous losers soared.
How long this goes on for remains to be seen as we work through the second wave and await wider distribution of the vaccines. In the short term, given such a sharp move in the space of a month, as I said earlier, it would not be a total surprise to see mean reversion kicking in to reverse some of this move subject to the BREXIT binary outcome. Ultimately though the recovery in value trend might have a bit further to run for now.
While the Compound Income Portfolio and those type of stock that I target didn't fully participate at least I bought some Temple Bar (TMPL) (which I mentioned on here a few weeks back) for my own more widely diversified portfolio and incredibly have seen it rise by nearly 50%. Which is some small consolation and does help to demonstrate how extreme some to the moves have been in such a short space of time.
So I guess readers will have to make up their own mind about how they want to play things from here but for what it is worth I share below an interesting video from Terry Smith where he debates quality versus value. Now obviously he is talking his own book but he makes some good points even if he has probably suffered a bit of under performance in the short term since this was filmed as a result of the V for Vaccine rally in value stocks.
Summary & Concluding Thoughts.
So great news for the World that a vaccine has, somewhat surprisingly, been found to be effective in record time compared to the usual 5 to 10 years or never that had been speculated about. This has led onto a record month in stock markets around the World as investors celebrated this and the stocks beaten down as a result of the virus have had a relief recovery as investors moved to discount an economic recovery and an improvement in their prospects.
In the short term this picture is a little complicated by the current second wave restrictions, but in the medium terms is seems reasonable to assume that some sort of normality might be restored by next Spring / Summer & a sharp year on year increase in economic activity should ensue. Obviously the tricky bit will be how quickly this happens and to what extent the economy gets back to some kind of normality or will behaviour be permanently changed?
The UK market seems quite well placed within this current phase as it is heavy in many of the value sectors like Banks, Miners & Oils which are currently recovering strongly. Beyond that it remains to be seen how long that trend continues and at what point the financial and economic effects of the Pandemic start to bear on the market & the economy. Generally it is suggested that when economies get up to 100% debt to GDP which is where we are headed, then economic growth tends to be harder to come by. Think about Japan and what has happened there since their bubble peaked and how they have since struggled to grow despite low interest rates and lots of fiscal stimulus and their equity index remains below where it was in 1989.
I guess you could say the same about the UK as we have gone 20 years already since the dot com bubble peak in 1999 with the FTSE still below where it was then. So I'd say enjoy the rally while it lasts and hopefully it might have a bit further to go as we are into a traditionally seasonally stronger period. You never know one day this decade maybe FTSE will make it convincingly through 7000!
However as a wise old Stock Broker often said to me "things are never as bad or as good as they seem." So in the same way as I said towards the end of October that you shouldn't get too bearish when FTSE was around 5700. Equally now about 6 weeks on with the market now around 6500 I wouldn't get too carried away. Nevertheless rightly or wrongly I stand by the comment that "in the long run quality dividend paying equities still seem like a decent way to find a growing yield with potential for capital gains in a low yield environment."
So there you go obviously good luck to with your investing and however you choose to go about it and of course it may be possible to get higher returns by trading aggressively and jumping into low quality recovery plays but that's not something I'll be doing for the Compound Income Portfolio.
All that leaves is for me to wish any readers of this a very Merry Christmas if that proves to be possible at the end of this terrible year and here's to hoping that 2021 is a better one all round.
I'll try and keep this brief as there is a lot going on in the world right now & October was, a is often the case, quite a poor one for the market.
Monthly Timing Indicators.
These in the main continue to suggest caution as the generally weak market returns in October kept the headline indices FTSE 350 & FTSE 100 6 to 7% or so below their trends. Somewhat surprisingly given what has been seen on the dividend front in my last post on here, the Mid 250 and Small cap indices fared better. As a result the 250 is only around 1% below its trend, while the Small Cap index has remarkably made it back into positive territory against its moving average trend as it actually saw positive total returns in October.
Compound Income Portfolio
The Portfolio saw a negative total return of -2.65% in October which was 1.17% better or less bad than the -3.82% from the FTSE All Share. This leaves the portfolio with a -12.76% total return for the year to date compared to -22.98% from the FTSE All Share. If I was still a fund manager I'd be delighted with a 10% out performance, but as a private investor I guess it is bit meh, but not too bad for a fairly low attention mechanical / Quant type approach. The full history and total returns over the last 5 and a half years are available in a table here if that's of any interest to you and these and comparisons with various UK indices are summarised in the graph at the end of this piece after the music playlist.
As for this months Screening there were three natural sells which came up based on their Scores. One of these was a long standing House Builder holding which I let go as it seems to me that the current run in the housing market may not be sustainable. That may of course prove to be too pessimistic if the Stamp Duty holiday and the Help to Buy Scheme should get extended next year like many of the other support schemes at the moment. The other two were at the smaller end of the scale. Despite these looking reasonable quality and being potentially cheap and oversold, they are still suffering from downgrades and an uncertain outlook - so following the process I let them go, although personally I might have been prepared to give them the benefit of the doubt for the longer term.
Against that I made some purchases of larger businesses in similar related areas of activity to the last two smaller stocks that were sold. While I replaced the house builder (despite my own reservations about miners) with a larger Gold miner which I'd skipped in recent months as the portfolio already had a smaller Gold miner, but it may now be a time for more exposure to gold perhaps? So I let it be bought this month as it had drifted back with the Gold price in recent months and we are apparently entering a seasonally stronger period for Gold.
Summary & Conclusion
So a difficult month for most UK Indices and the Compound Income Portfolio although it managed to outperform the broader market probably in part thanks to its greater exposure to Mid & Smaller Cap stocks which managed to outperform too.
The UK Market Timing indicators continue to suggest a cautious approach overall, although Small Caps have turned bullish which may or may not be of any significance to the broader market, but here's to hoping it is.
Any way as we enter a second lock down in England I'll leave you with some music to be going on with in a Playlist I made up during the last lock down and have add to since - enjoy (?) and I hope that you and your family manage to stay safe and well through what looks like being a tough winter.
Having mentioned the dividend flows in the market and for the Compound Income Scores Portfolio in the September / Q3 update, I thought I'd provide an update having read the latest Link Asset Service Dividend monitor recently.
For the portfolio it looks like things are looking up on the dividend front this month with 9 holdings having gone or are due to go Ex Dividend, which is two times more than last year and the totals received are also over double. So as I said in the last update the large fall in year to date income, whilst no doubt reflecting the trends in the market, also reflects some stock and timing differences this year too.
As for the Link Asset Services I'll not try and regurgitate too much of the detail here but offer a few key takeaways and observations plus a link to the full document if you missed it and should wish to download a copy and read it for yourself. Below is their Executive summary with my thoughts thereafter.
Thoughts and Observations
Personally I find it somewhat surprising that Mid and Small Caps have cut more both in number and in quantum as these indices have gone onto outperform the FTSE. Then again perhaps I shouldn't be as Mid and Smaller Companies may be more vulnerable to effects of the virus / shut downs etc. and dividends are not really driving returns this year or any other year for that matter.
In terms of the outlook they seem to think we are through the worst of the battle on the dividend front as we have seen some Companies starting to reinstate or make up for missed dividends in some cases. As a result they see the underlying dividends falling by around 39% for the year and by about 45% if one includes specials. So this is not far off the 30 to 50% falls that were talked about earlier in the year.
While for next year they are expecting some modest bounce back in dividends and tentatively suggest growth of 6% to 15% on a worst case to best case scenario. On this basis they see the current prospective yield being between 3.3% and 3.6% which they suggest leaves UK Equities looking fair value.
Thinking about that and the Ready Reckoner I presented back in the Spring that would be at the bottom end of the yield range of roughly 3.5% to 4.5% that we have seen for FTSE in recent years. With dividend having been cut back to more sustainable(?) levels then may be it makes sense for the market to trade towards the bottom of the range on a yield basis, perhaps. This is especially so given the fall in interest rates, bond yields, property rents and talk of negative rates by the Bank of England.
For what it is worth I present an updated version of the FTSE Ready Reckoner with two new rows reflecting Links latest thinking versus my original 33% to 50% cuts estimates and the original 3.5% to 4.5% range. Thus far the market seems to have operated on the basis of a 30 to 40% cut priced off of 3.5% or 5800 - 6400 roughly speaking.
Summary & Conclusion
So hopefully the worst is over on the dividend front for the UK market with a fall of 40 to 45% or thereabouts in dividends still foreseen, although this may have been discounted if investors are prepared to price those dividends off of a 3.5% yield. If not or if dividends were to fall a bit more then a re-test of the March 5200-5,000 lows on FTSE still can't be ruled out.
Indeed that leaves it looking pretty bedraggled and war torn with the chart trending down below its moving averages. Not great, as we head towards BREXIT but hopefully some resolution or last minute deal there and better news on the Virus front if a Vaccine should become available in the not too distant future might help sentiment. Failing that it seems we are in for a long hard winter as greater lock downs seem to be creeping around the Country and spreading South and Eastwards from the North and Wales!
Having said that it is a market of Stocks and there are always opportunities out there for individual stock pickers as demonstrated by some who have still managed to show decent positive returns despite all the problems. in addition UK Equities look pretty unloved and a bit cheap in a global context. So I wouldn't get too bearish and in the long run quality dividend paying equities still seem like a decent way to find a growing yield with potential for capital gains in a low yield environment. If you need help finding these don't forget that's exactly the type of stocks the Compound Income Scores try to identify.
Failing that if you would rather go down the pooled fund route & go active then I'd still recommend Investment Trusts which benefit from their closed end structure, independent boards and the ability to gear which can help to enhance or detract from returns depending on market conditions. They also tend to have revenue reserves and the ability to pay dividends from Capital which can make their dividends more reliable.
Given the bombed out nature of UK Equities it might be worth investigating a few UK Funds like Law Debenture (LWDB) which has solid reserves and benefits from an operating subsidiary which helps fund a fair chunk of its dividend and trades at a 4 to 5% discount with an experienced management team from Janus Henderson and offers a 5% yield.
Or there are a couple on wider discounts of around 10% which are either under new management in the case of Edinburgh Investment Trust (EDIN) or about to be in the case of Temple Bar (TMPL). Of these Edinburgh has increased it dividend and has decent reserves while Temple Bar has had to cut and will use reserves to pay its suggested dividend. But both might be interesting as a source of decent income from diversified portfolios, although you'd have to satisfy yourself that you are happy with the portfolio strategy of their new mangers.
Any way I'll leave it there as this note has already taken me longer than I thought and ended up longer too. So I'll leave you with a picture of the dividend history and outlook to sum up as I continue play some of my old favourites in the Stock market and on Spotify too.