Yield-starved investors seek dividend income as share rally falters

Tue May 20, 2014 5:46am EDT

* Dividend investing back in fashion as rally falters

* Low bond yields limit alternatives to equities

* Vodafone, Apple, BHP Billiton screen as reliable payers

By Francesco Canepa

LONDON, May 20 (Reuters) - Global investors are hunting for reliable dividend payouts as they grapple with jittery equity markets and meagre bond yields, marking the revival of an investment style that has been shunned for the past two years.

Dividend investing is back in vogue as lofty equity valuations, amid still sluggish economic growth, cap the potential for further share price gains while low bond yields limit the attraction of fixed-income assets.

Having lagged a market rally over the past two years, the MSCI World High Dividend Yield Index has outperformed this year as more cyclical sectors, such as Internet companies and small caps, falter and yields on lower-rated bonds remain depressed.

"People have become more risk averse and that is a big element of the dividend story," said Andrew Parry, chief executive officer of Hermes Sourcecap, which manages assets worth 2.4 billion euros ($3.29 billion).

"And with bond yields so utterly low ... you buy equities to bolster your returns."

The MSCI World High Dividend Yield Index offers a yield of 3.8 percent, compared to 2.5 percent for the broader MSCI World Index and 1.8 percent for global bonds in a Bank of America Merrill Lynch index, Datastream data showed.

The dividend index underperformed the market in 2012 and 2013 as investors bet on economic recovery and leaned towards stocks with high growth prospects, such as small-cap companies, tech stocks like Facebook or Twitter and euro-zone banks.

CAPITAL PRESERVATION

The high-dividend index is comprised of companies which offer higher-than-average dividend yields and whose balance sheet and earnings can sustain future payouts.

They include U.S. pharmaceutical and consumer goods company Johnson & Johnson, Swiss food maker Nestle and oil major Chevron.

"The focus should be on capital preservation," said Andrew Lapthorne, head of quantitative equity research at Societe Generale.

"You're not really looking for upside in the stock, you're looking for stocks which do best if there is a market wobble. For that, you always want to minimise your balance sheet risk and dividend payments that are covered by profitability."

Global sectors that stand out for dividend payouts are telecoms, utilities and oil & gas, with yields of between 3 percent and 4.5 percent, Datastream data showed.

Dividend investors must be careful to weigh high payout ratios against the risk a company may be forced to cut its dividend in the face of shrinking profit or mounting debt.

For this reason, fund managers screen for large-cap companies which boast high returns and low debt, such as British telecoms operator Vodafone, U.S. consumer technology group Apple and global miner BHP Billiton .

They are among 87 large caps that are expected to offer a dividend yield of more than 5 percent on annual profit for this year, carry a net debt pile worth less than half their equity and have a return on equity of more than 20 percent, according to StarMine data.

"Dividend investing is attractive in the current environment," John Ventre, head of multi-manager at Old Mutual Global Investors, which manages assets worth 6.2 billion pounds ($10.43 billion).

"(But) the yield needs to be sustainable, so you should be looking for stocks which won't need to cut their dividend." ($1 = 0.5942 British pounds) ($1 = 0.7297 euros) (Editing by Lionel Laurent and Susan Fenton)