Let me get the point out up front. The UK market is insanely cheap. The FTSE 100 pays out on average just over a 4% yield in dividends. The S&P 500 is 2%.
Right there we can surmise the FTSE 100 is half price to the US markets.
We can make the same sort of caluculation in many ways.
Lets take all the shares in the FTSE 100 with dividends over 3%, total up their market caps and adjust them so they yield 3%. 3% is a nice dividend in a low interest rate world about to go back to zero interest rates again.
This adjustment would stick 50% on to the FTSE’s price.
Now lets look at a selection of 20 big cap companies and at their dividends.
*disclosure I hold these shares as part of an income portfolio strategy.
It doesn’t take a highly paid fund manager to pull out this kind of portfolio of household name big cap names. While I own many of them selected via a different set of filters, these can be pulled out, simply by sorting the FTSE by dividend above 6%.
Its hard to credit such a situation can exist, all the while dividend shares in the UK keep on falling.
This makes it a classic contrarian situation.
Why is this the acute situation happening? There are two reasons.
… make that 3…
Brexit uncertainty is a drag. The ongoing saga is sure to go down in history as a monumental shambles and this must be 10% off the FTSE 100.
US QT and the slowing of and ending of other global QE programs sees money supply liquidity draining away. This money supply is coming out of carry trades like dividend stocks and its leaving faster than the general market can replace it.
There is a major fund management saga going on in the UK weighing heavily on market flows and having particular impact on income stocks.
This is the why. So what about the ‘what next.’
Its really bullish as far as I’m concerned and I’m up to my ears in many of the above shares because value is value and there is no better indication of value than companies tipping their money into the pockets of their shareholders.
Brexit. It couldn’t get worse for uncertainty. Even a disastrous hard Brexit would be hard pushed to chop another 10% off the market. The pound exchange rate is once again indicating Brexit is once again a possibility and this is dragging on the UK market somewhat. The UK market is full of international trading companies so all in all most of the downside should already be priced in.
US QT ends this autumn and might just go into QE. The end of QT is bullish and QE, very bullish.
The media will get bored of fund managers soon and life will go on and flows restart.
So it’s a matter of waiting out the summer, collecting 6-8% in dividends and possibly catching a few takeovers, as foreign companies swoop in to google up cheap sterling denominated companies.