20 | SHARES | 23 May 2019
FAT TAIL OF HIGH-YIELDING STOCKS
'ĞƌŐĞů͕ǁŚŽǁŝƚŚDĂƩdŝůůĞƩĐŽͲŵĂŶĂŐĞƐƚŚĞϭϯϬ
year-old DĞƌĐŚĂŶƚƐdƌƵƐƚ;DZ,Ϳ investment fund,
believes tŚĞŵĂƌŬĞƚŚĂƐďĞĐŽŵĞƉŽůĂƌŝƐĞĚǁŝƚŚƚŽŽ
many investors over-paying for what are perceived
to be quality, defensive growth companies with
below-average yields.
dŚĂƚŚĂƐůĞŌĂůĂƌŐĞƐǁĂƚŚĞŽĨŐŽŽĚ
companies with rising earnings and dividends,
ĂƐǁĞůůĂƐĂƩƌĂĐƟǀĞLJŝĞůĚƐ͕ůŽŽŬŝŶŐǀĞƌLJĐŚĞĂƉďLJ
comparison.
ƐĂŶĞdžĞƌĐŝƐĞǁĞƐĐƌĞĞŶĞĚƚŚĞ&d^ ϭϬϬŝŶĚĞdž
ƚŽůŽŽŬĨŽƌƐƚŽĐŬƐLJŝĞůĚŝŶŐςй͕ŽƌϮρйŵŽƌĞƚŚĂŶ
ƚŚĞĐƵƌƌĞŶƚŵĂƌŬĞƚĂǀĞƌĂŐĞ͘
What we found was a surprisingly large number
ŽĨǁĞůůͲŬŶŽǁŶ͕ǁĞůůͲƌƵŶĐŽŵƉĂŶŝĞƐǁŚŝĐŚŝŶŵĂŶLJ
ĐĂƐĞƐĂƌĞLJŝĞůĚŝŶŐƐŝŐŶŝĮĐĂŶƚůLJŵŽƌĞƚŚĂŶƚŚĞ
ŵĂƌŬĞƚĂǀĞƌĂŐĞ͘
dŚŝƐ͚ĨĂƚƚĂŝů͕͛ĂƐŝƚŝƐŬŶŽǁŶŝŶƐƚĂƟƐƟĐƐ͕ŝŶĐůƵĚĞƐ
ƐŽŵĞŽĨƚŚĞďŝŐŐĞƐƚƐƚŽĐŬƐŝŶƚŚĞ&d^ ďLJŵĂƌŬĞƚ
value and some of the biggest dividend payers in
absolute terms.
In fact, of the 10 biggest dividend contributors to
ƚŚĞ&d^ ŽǀĞƌĂůů͕ĨŽƵƌƐƚŽĐŬƐĂƌĞLJŝĞůĚŝŶŐŵŽƌĞςй
ǁŚŝůĞĂŶŽƚŚĞƌƚŚƌĞĞĂƌĞLJŝĞůĚŝŶŐũƵƐƚƵŶĚĞƌςй͘
ĞƐƉŝƚĞƌĞĐĞŶƚůLJĐƵƫŶŐŝƚƐĚŝǀŝĚĞŶĚďLJκϬй͕
mobile operator sŽĚĂĨŽŶĞ;sKͿƐƟůůƐĐƌĂƉĞƐ
ŝŶƚŽƚŚĞƚŽƉϭϬŝŶƚĞƌŵƐŽĨĐŽŶƚƌŝďƵƟŽŶƚŽƚŽƚĂů
dividends although its share price has been very
ǁĞĂŬŝŶƚŚĞƉĂƐƚĨĞǁLJĞĂƌƐ͕ŵƵĐŚƚŽƚŚĞĨƌƵƐƚƌĂƟŽŶ
of its shareholders.HIGH PROPORTION OF FINANCIAL STOCKS
tĞĨŽƵŶĚƚŚĂƚϮϯŽƵƚŽĨƚŚĞϭϬϬƐƚŽĐŬƐŝŶƚŚĞ
index have dividend yields of 6% or more, with the
ďŝŐŐĞƐƚĐŽŶĐĞŶƚƌĂƟŽŶŝŶĮŶĂŶĐŝĂůĮƌŵƐ͘ůŽŶŐǁŝƚŚ
ĮŶĂŶĐŝĂůƐ͕ƚŚĞƌĞĂƌĞƐŵĂůůĞƌĐůƵƐƚĞƌƐŽĨŵŝŶĞƌƐ͕
ƵƟůŝƟĞƐĂŶĚƚĞůĞĐŽŵŽƉĞƌĂƚŽƌƐ͕ŚŽƵƐĞďƵŝůĚĞƌƐ͕
media and tobacco companies.
/ƚ͛ƐǁŽƌƚŚŶŽƟŶŐƚŚĂƚĂƚƚŚĞŽƚŚĞƌĞŶĚŽĨƚŚĞ
ƐƉĞĐƚƌƵŵƚŚĞƌĞĂƌĞƚǁŽƐƚŽĐŬƐǁŚŝĐŚƉĂLJŶŽ
ĚŝǀŝĚĞŶĚƐĂƚĂůů͗ĨĂƐƚͲĨŽŽĚĚĞůŝǀĞƌLJĮƌŵ:ƵƐƚ Ăƚ;: ͘Ϳ
and online grocer KĐĂĚŽ;KKͿ.tŝƚŚŝŶĮŶĂŶĐŝĂůƐƚŽĐŬƐ͕ƚǁŽŽĨƚŚĞƚŽƉLJŝĞůĚĞƌƐ
ĂƌĞŚŝŐŚƐƚƌĞĞƚďĂŶŬƐ,^;,^Ϳand ZŽLJĂůĂŶŬ
ŽĨ^ĐŽƚůĂŶĚ;Z^Ϳwhile the other six are insurers.WHY IS THE MARKET
SO SCEPTICAL?
tŚĞŶƐƚŽĐŬƐĂƌĞƚƌĂĚŝŶŐŽŶŚŝŐŚƐŝŶŐůĞͲĚŝŐŝƚŽƌ
low double-digit yields it is normally a sign that
ƚŚĞŵĂƌŬĞƚƚŚŝŶŬƐĞŝƚŚĞƌƚŚĞĐŽŵƉĂŶLJŝƐŶ͛ƚŐŽŝŶŐ
ƚŽŵĞĞƚŝƚƐƉƌŽĮƚĨŽƌĞĐĂƐƚƐ͕ŽƌŝƚĚŽĞƐŶ͛ƚƉŚLJƐŝĐĂůůLJ
have the cash to pay the dividend, and therefore
ƚŚĞLJŝĞůĚŝƐŶ͛ƚƐƵƐƚĂŝŶĂďůĞ͘
That was clearly the case at outsourcers Carillion
and Interserve, which were both yielding well over
10% on paper before they failed, and at Vodafone
before it slashed its payout in order to fund its 5G
investment programme.
,ŽǁĞǀĞƌ͕ǁŚĞŶƐƚŽĐŬƐƐƵĐŚĂƐŵŝŶĞƌBHP
;,WͿ͕ĐŝŐĂƌĞƩĞŵĂŬĞƌ/ŵƉĞƌŝĂůƌĂŶĚƐ;/DͿ
and housebuilder WĞƌƐŝŵŵŽŶ;W^EͿ are yielding
ƵƉǁĂƌĚƐŽĨεй͕ǁĞŚĂǀĞƚŽĂƐŬŚŽǁŵƵĐŚďĂĚ
ŶĞǁƐƚŚĞŵĂƌŬĞƚŝƐƉƌŝĐŝŶŐŝŶĂŶĚǁŚĞƚŚĞƌŽƌŶŽƚŝƚ
ŝƐďĞŝŶŐƌĂƟŽŶĂů͘dŚĞƌĞĂƌĞĨŽƵƌƋƵŝĐŬĐŚĞĐŬƐǁĞĐĂŶĚŽƚŽƚĞůů
ǁŚĞƚŚĞƌƚŚĞĚŝǀŝĚĞŶĚŝƐƐĂĨĞ͕ĂƚůĞĂƐƚŝŶƚŚĞŽƌLJ͗- ƌĞĚŝǀŝĚĞŶĚƐĐŽǀĞƌĞĚďLJĞĂƌŶŝŶŐƐ͍
- ƌĞĚŝǀŝĚĞŶĚƐĐŽǀĞƌĞĚďLJĐĂƐŚŇŽǁ͍
- How much are interest payments covered?
- ,ŽǁďŝŐŝƐƚŚĞƉĞŶƐŝŽŶĚĞĮĐŝƚ͍
dŚĞĮƌƐƚƚǁŽĂƌĞƐƚƌĂŝŐŚƞŽƌǁĂƌĚĂŶĚƵƐĞƚŚĞ
ƉƌŽĮƚĂŶĚůŽƐƐĂŶĚĐĂƐŚŇŽǁƐƚĂƚĞŵĞŶƚƐ͘dŚĞ
ƐĞĐŽŶĚƚǁŽĂƌĞůĞƐƐƐƚƌĂŝŐŚƞŽƌǁĂƌĚĂŶĚŝŶǀŽůǀĞ
ůŽŽŬŝŶŐĂƚƚŚĞďĂůĂŶĐĞƐŚĞĞƚďƵƚŝŶƚĞƌĞƐƚĐŽƐƚƐĂŶĚ
ƉĞŶƐŝŽŶĚĞĮĐŝƚƐĂƌĞŚŝŐŚĞƌƵƉƚŚĞůŝƐƚŽĨƉƌŝŽƌŝƟĞƐ
than dividends when a company comes to divvying
up its cash.
dŚĞƋƵĞƐƟŽŶŽĨƚŚĞƉĞŶƐŝŽŶƐĐŚĞŵĞŝƐ
ƉĂƌƟĐƵůĂƌůLJƌĞůĞǀĂŶƚďĞĐĂƵƐĞ͕ĂŌĞƌƚŚĞƐĐĂŶĚĂů
ŝŶǀŽůǀŝŶŐ,^͕ĮŶĂŶĐŝĂůƌĞŐƵůĂƚŽƌƐŚĂǀĞďĞĐŽŵĞ
much less tolerant of companies paying out large
ĚŝǀŝĚĞŶĚƐǁŚŝůĞƚŚĞLJƐƟůůŚĂǀĞďŝŐĚĞĮĐŝƚƐ͘VODAFONE STILL SCRAPES
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