By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 14 February 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Warren Buffett always tells us that his intended investment holding period is forever, that he buys stocks he would be happy to hold if the market closed down for five years. I guess, then, if you’re Warren Buffett then the market travails of the last few days won’t bother you. If you’re not Mr Buffett I offer a few thoughts.
Firstly, this isn’t a crash – not yet, anyway. We have, so far, ratcheted up a (long overdue) “correction” – which is a 10% fall from the high point. Of course, seeing the Dow down by over 1,000 points in a single session makes it feel very dramatic, but so far it is just a correction (though there is nothing to stop the selling extending past 20% and into a bear market).
Having had a crazy bull market in both stocks and bonds, now both have sold off. Bonds have been sold off because the threat of this new thing called inflation means the threat of higher interest rates. Higher interest rates mean lower bond prices. But higher interest rates also mean more expensive corporate borrowing, and greater pressure on overborrowed consumers – so equities have been hit too. And of course government finances will be hit as more interest has to be paid on newly minted treasuries.
But the market squalls of recent days simply feel (to me) like a replay of the “taper tantrum”, when markets reacted badly to the Fed suggesting it might have to raise rates a little. How far the sell-off might go I can’t predict. Bears will tell you it is the beginning of the end, and I have considerable sympathy with the general ideal that the market is (still) in a bubble. But I would like to find a few things to invest in which offer some safety and income, and whilst much of the market is indeed in a bubble, I fancy there are a few thing which are out favour. Perhaps it is because they haven’t plastered the word Blockchain over the corporate entrance hall. Or they are just seen as too boring.
I remember the .com boom when “safe” stocks with great big yields were sold off. They roared back and anyone (including Neil Woodford) who piled in made a killing. I wonder if there is a similar thing going on now.
In theory, big dividend-paying stocks should come out of all this sell-off a bit cheaper because bonds are (supposed to be) safer, and are now paying a better rate of interest than they were, so income investors will head out of income stocks (where many shouldn’t have been anyway).
But bond yields are still well below income shares. Indeed, the yield on the whole FTSE100 still sits at 3.84%, according to www.dividenddata.co.uk - a good bit higher than US 30-year treasuries (currently 3.12%, according to CNBC), and UK 30-year treasuries (currently 1.98%). I fancy there may be some bargains amongst the FTSE100.
I’m sure there are a few crocks amongst our top 100 stocks, and I am (perhaps illogically) still nervous of banks (which feature heavily), but I can’t help thinking that an opportunity to buy an off-the-shelf income portfolio may be sitting there. If we look at the biggest 10 stocks, we have the following yields on offer:
HSBC – 5%
Shell (RDSA) – 5.93%
BATS – 3.98%
BP – 6.06%
Shell (RDSB) – 5.87%
GlaxoSmithKline – 6.20%
Diageo – 2.57%
Astrazeneca – 4.18%
Vodafone – 6.60%
Glencore – 1.34%
Ok, Shell appears twice, I don’t like banks and I don’t trust Glencore. So we’ll add numbers 11 and 12:
Rio Tinto – 5.28%
Lloyds – 4.06%. Except that’s another bank, so
Unilever – 3.37%
A few other high yields spring out further down the table:
National Grid – 6.05%
Imperial Brands – 6.56%
BT – 6.82%
Aviva – 4.96%
Legal and General – 5.77%
SSE – 7.79%
Standard Life Aberdeen – 5.1%
Persimmon – 5.58%
Centrica – 9.48%
ITV – 4.56%
British Land – 4.68%
Pearson – 5.97%
Direct Line – 4.28%
United Utilities – 5.90%
Evraz – 6.0%
M&S – 6.49%
Severn Trent – 4.84%
Hammerson – 5.31%
I’m not for a moment saying those numbers make all those shares a buy. For a start, some are a bit out of date, and others face being trimmed and some are only sustainable because of government subsidies (house builders).
But it looks like a good shopping list from which to do more research. Especially if prices fall further. My bet is that we should be able to narrow that lot down to, say, five stocks and make some very good money.
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