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Working Lunch Tuesday, 4 February, 2003, 16:45 GMT
Yield of dreams
A high dividend yield on your shareholding should be a good thing.

It's your share of the profits in the company you own, so a good return ought to mean things are going well.

But such is the turmoil caused by the fall in the stock market, that's not necessarily the case.

Let's start with the basics.

There are two ways of making money from a share.

Higher price

The first is by selling it at a higher price than it cost you.

The second is collecting your portion of the profits - the dividend.

The dividend yield is a way of judging how much you make from a share in the form of dividends.

It enables you to compare the rate you earn from a share with the rate you would make from a bank or building society account.

The point is that some of these rates are very high at the moment.

  • Royal & Sun Alliance - 9.07%
  • Lloyds TSB - 8.68%
  • Rolls-Royce - 8.40%
  • BAe Systems - 8.31%

    The problem here is that dividend yields can be misleading.

    Yield graphic
    How the figures work out
    A share which costs 1 and paid a dividend last year of 10p pays a dividend yield of 10%.

    If the share price falls to 50p and last year's dividend is the same at 10p, the dividend yield would automatically jump to 20%.

    So the dividend yield looks very high but that's because the share price has collapsed.

    That could still be good news if the company maintains last year's dividend despite the collapse in its share price.

    Then you are getting a great interest rate for a small outlay.

    Problems

    But it's bad news if the share price fall reflects problems in the company which will mean a future dividend cut.

    Then the dividend yield is very misleading.

    Hilary Cook
    It's a case of looking very close to see how strong is the underlying business proposition.

    Hilary Cook
    Barclays Private Clients
    That's because the figure uses today's share price but last year's dividend.

    So going with a high dividend yield is good only if the company keeps its dividend payments the same.

    And even if the dividend payment remains good, there is always the risk that the share price falls further, which undermines your capital.

    "There are certainly some very attractive shares in the FTSE 100 index yielding a very attractive amount of money," agrees Hilary Cook of Barclays Private Clients.

    "It's a case of looking very close to see how strong is the underlying business proposition.

    Good rate

    "British American Tobacco is yielding, net of basic income tax, 5.7 %. It's a very cash-generative company and able to grow that dividend.

    "Great Universal Stores, owner of Argos, is yielding 4%. Those are examples of very strong companies where you can get a good rate of income."

    But Hilary thinks some payouts are less secure.

    "We will certainly see some dividend cuts," she predicts.

    "Where the rate of income payout is very high companies will feel they have to. There will be some but not across the board."

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