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This is a trend that has been in evidence for years now, in fact since the financial crisis. Global quantitative easing efforts, designed to provide liquidity and kick-start an economic recovery, have pushed investors into bonds, driving up the price and consequently sending yields lower. As a result, investors looking for income have been forced to buy equities as well to provide regular payments.
When looking at the FTSE 100, there are several ways to capture income in an effective way. The first is via an ETF, which in this case would be the iShares UK dividend ETF. This ETF invests in the top 50 dividend payers in the FTSE 350 index (excluding investment trusts), with top ten holdings in the likes of Aberdeen Asset Management, Shell, BP and HSBC.
The current yield of 5.8% is well in excess of the FTSE 100 as a whole (3.7% as of the end of July 2016), and the international focus of many of the names in the ETF means the fall in sterling will make these firms even more attractive. A weaker pound will help to benefit revenues when translated into sterling, boosting income and potentially leading to higher dividends at some companies. With a five-year dividend growth rate of 7.8%, the ETF looks to be an interesting way of finding income in the current financial climate.
The second way would be to pick out individual sectors and companies with strong yields. However, investors should remember that no share should ever be purchased just for the yield on offer. Dividends can be cut just as easily as they can be increased, and excessively high yields are usually a danger sign (remember, the yield moves inversely to price).
A way of providing some extra potential security on dividends would be to scan for earnings per share (EPS) and dividends per share (DPS), and then selecting those sectors where EPS was comfortably higher than DPS. For example, the energy sector of the FTSE 100 has a yield of 7.5%, and is expected to pay out 1.37p per share in dividends over the coming year. However, earnings per share for the same period are expected to be 1.13p, so payouts could be at risk of being cut to reduce this shortfall and cut back on cash burn.
The current list of dividends by sector is shown below: