Investors rattled by the current turmoil in global markets should consider the importance of dividend yields before selling.
FTSE 100 company BP, for example, is holding its own despite the newly volatile market conditions. The company yesterday (6 February 2018) published underlying profits up 139% and a dividend yield of 6.2%.
Richard Hunter, head of markets at interactive investor (Moneywise’s parent company), explains BP’s results: “Wider market weakness has eclipsed the sturdy performance which BP has delivered.
“The company’s ability to generate cash remains prodigious, underpinning a supportive share buyback programme and a dividend yield of 6.2%, which has remained a stable source of income for investors over recent, leaner years.”
Justin Cooper, chief executive of Link Market Services, part of Link Asset Services agrees, and points to the importance of the company’s dividends in the current climate: “When stock markets are so volatile, it's helpful to remember how important the income is that UK companies provide to their shareholders.
“Dividends make up the lion's share of equity returns over the longer term, and they almost always continue however fearful or greedy the markets become.”
Mr Hunter adds: “Quite apart from the tailwinds of a generally improving and stable oil price, BP today is in fine shape, particularly considering the tribulations of recent times. The shares have not necessarily reflected this recovery, having dipped 8% over the last three months and having scraped a 0.7% rise over the last year, as compared to a 2.3% gain for the wider FTSE100.
“Notwithstanding the haze surrounding global markets today, the strength of the figures is in plain sight and the general market view of the shares as a buy will surely stay intact.”
‘Appreciate your dividends’
Moneywise reported last year that seven in 10 UK Equity Income funds hold a selection of 10 companies, BP included. Despite the current market sell-off, the fundamentals of these companies remain unchanged, and this should give pause to investors in these flagship funds looking to cut and run.
Mr Cooper explains: “BP is the third largest payer of dividends in the UK, and although it has left its quarterly payout unchanged, rebounding profits on the back of higher oil prices mean that its dividend is more secure than at any time in the last couple of years.”
Justin Urquhart Stewart of Seven Investment Management (7IM) told Moneywise recently that investors should expect more volatility in the markets in 2018 but that this presents an opportunity. Among his recommendations for shares to hold were large UK banks such as HSBC and Lloyds, due to their ability to withstand significant stress tests from regulators (and therefore, a market downturn).
Asked where he thinks the FTSE 100 will head this year, Mr Urquhart Stewart offered a mixed message: “I think we are going to see some dramatic moves – sideways. I can see actually 2018 being in a position where we're going to see quite a bit of volatility as markets do go up and down
“Once we hit the volatility it will then continue for a while. But at the end of that, I suspect there's a very good chance we'll end up exactly where we started.
“So, I think it's going to be one of those years where you appreciate your dividends, enjoy your compounding, but actually end up at round about the same level as we started this year.”
Moneywise First 50 Fund City of London Investment Trust holds BP. Watch the interview with the trust’s manager Job Curtis: