|Swings and roundabouts|
By contrast, yield from dividends is usually seen as having a risk premium because you can quite easily lose some - or all - of your money. And pension funds, in particular, have to look at risk very seriously.
What is perhaps surprising is that this dividend risk premium is now positive and is at a generational high - with dividends now paying a premium over gilt yields last seen in the early 1950s. And bear in mind that Mr Market's memory usually only goes back a year or two!
The following graph comes from Coutts' Daily Themes:
There are differences, of course, as the article points out:
- Firstly the absolute level of dividend yields on UK stocks in 1952 was relatively high at 6%, compared to a current yield of a little over 4% - and inflation was around 6%
- Pension funds in 2012 continue to ‘de-risk’ by selling equities and buying ultra-low-yielding government bonds
However, they note that: "Even assuming no dividend growth over the next 10 years, the effective breakeven (forward) price of the FTSE All Share is some 22% lower than current levels compared to government bonds."
The article concludes: "The good news for private investors is that they can take advantage of this perverse asset allocation to pick up high-yielding dividend stocks with long-term potential for dividend growth at attractive prices."
Because I'm pretty sure the pension funds will soon be rediscovering the value of dividend shares - particularly those pension funds of large FTSE companies that have a huge deficit.
I feel a boom in dividend shares coming on.
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.