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Dividends continue to increase but caution is still needed

As many believe a double dip is around the corner, increased returns are on every investor’s mind. One way to achieve this can come in the form of dividends as they continue to increase.

Shore Capital stockbrokers is forecasting dividends will grow 15.9% by the end of this year and a further 12.6% in 2012, even though the dividend futures market suggests pay-out cuts next year. With the latter in mind, investors need to think carefully and avoid being dazzled by the high figures.  

 ‘Dividend achievers’ are those companies that have increased their dividend payout each year for the last five or more consecutive years. The UK has provided a stable home for these high dividend yielding stocks, with hundreds of firms increasing dividends. The rush to capitalise on this in recent years has made sense. However, the higher-ranked performers may not be as appealing as they seem and investors must look at the books with a cautionary eye.

Across the market, UK dividends are up as companies feel under pressure from investors to return cash instead of spending it on expansion. This certainly makes sense given the gloomy economic environment this country continues to be in.

However, forward thinking investors shouldn’t put all of their return eggs into one basket and simply search for high yield stocks only. Instead, it is important for them to seek stable stocks to avoid large losses.

High dividends can reflect a host of positives and best practice followed by the company. It can mean a healthy diagnosis in sustained earnings and revenue growth. It can also mean that those in charge of steering the ship are believed, as each dividend could demonstrate a vote of confidence by the board directors.

However, high dividend yields can also reflect investors’ negative views of a stock’s present worth and future performance.  Despite the fact that a company may have made substantial payments over recent years, this could be seen as a sweetener when its share price falls. This can mean companies are willing to offer sizable compensation in the form of dividends in the run up to an anticipated share price crash. This makes the shelf life of some high achievers very short. For those in this sector, the search for stability is of paramount importance.

In the case of Tim Moore, manager of UK Equity Income Unrestrained Fund at Standard Life Investments, this lesson was a painful one. Moore enjoyed the benefits of high returns outside the biggest dividend payers in the benchmark FTSE 100. For two-and-a-half years, hunting high incomes paid off, until his returns took a nose dive.

Moore’s fund, which targets individual investors rather than pension funds, posted a total return of 84% from the start of 2009 to the end of the second quarter. By the end of the third quarter, it had dropped to 54%. Although the fund was still highly ranked in its sector, the stark falls demonstrates why investors must investigate the background of dividend payments in order to avoid a nasty surprise.

This month, Shore Capital identified companies which should provide investors with a stable dividend, despite the worsening economic environment. Companies including HSBC, GSK, Unilever and Tesco are recommended dividend payers as it is anticipated they will provide the stability which is so crucial to risk adverse investors.

The philosophy exercised by Indxis is all about consistency. Chasing sporadic high dividends has haunted many, as investors overlook companies’ shortcomings in favour of cash. Research is key, and availability of tools in the market now allows in-depth analysis of thousands of stocks. The result is consistent performing returns, security and peace of mind during turbulent times.

As UK interest rates remain historically low, income remains all-important. Choosing the right kind of income is even more important still.

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