Monday 22 February 2021

London's High Yield Shares

Although I currently recommend diversified ETFs there may still be room in your portfolio for a bit of a gamble on an individual high-yield share. Here we have a look at a current review of likely candidates quoted on the LSE

The Daily Mail today published an interesting article  by Russ Mould, AJ Bell Investment Manager about London's high yield shares.

Overall, the FTSE 100 is forecast to offer a 3.8 per cent dividend yield for 2021, easily beating cash, and government bond yields as well as inflation – but it clearly comes with capital risk. Nearly a third of the index offer a yield above 4 per cent (and 23 more than 5 per cent). The FTSE 100 is particularly interesting as its highest-yielding names all offer yields of 6 per cent or more.

Source: Daily Mail

The usual caveats about high yield shares are given:

  • Look at earnings cover (to degree to which forecast earnings per share cover the forecast dividend per share) and free cash flow cover. Multiples of two or higher will offer comfort. 
  • Look at the balance sheet, to see how much debt is on there, whether there is a pension deficit or big lease obligations, and cross-reference that with operating profit.
  • If interest cover is good (operating profit and interest income exceed interest expenses by at least two times) then again a firm may be able to keep paying even if times take a turn for the worse.
  • Very high yields on offer all suggest that investors view these stocks as risky and are demanding a high return to compensate themselves for the dangers involved.

The author's picks include
  • Rio Tinto and BHP Billiton, which have substantially reduced their debts and cleaned up their balance sheets and may be able to ride rising commodity prices should the global economy start to recover.
  • Polymetal: If the global economy tanks and central banks conjure up more quantitative easing and rate cuts, gold could prosper in the face of such money creation.
  • Persimmon has a net cash balance sheet and operates in a market where Government support is on offer even though demand already exceeds supply. 

I'll be looking at a couple of these potential buys in future posts.

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.

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