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Dividend yields exceed those on bonds

European equity dividend yields have climbed above bond yields again for just the third time in 30 years, potentially signaling another market inflection point.

Yields previously crossed over in March 2003 and late 2008, marking the market bottom on both occasions according to a note from Citigroup.
Robert Buckland, an analyst at the firm, says recent moves in government bond yields and price/earnings ratios mean relative valuations are once again near historical highs.

“Even in Japan, the crossover of dividend and government bond yields has been a reasonable short-term market timing too in 1998, 2002/3 and 2005,” he adds.

Against such a background, Citigroup has identified several stocks yielding above sovereign debt, as well as offering positive earnings momentum and predicted dividend growth.

In the UK, Citigroup highlights BAE Systems, Pearson and Reed Elsevier, yielding 5.2 per cent, 4 per cent and 4.3 per cent respectively, all held by Anthony Cross in his Liontrust First Growth portfolio.

Cross and his co-manager, Julian Fosh, use a process called economic advantage on their funds, selecting companies boasting barriers to entry through either intangible assets, distribution or recurring revenue streams.

Cross highlights the growth credentials of these three stocks, although their yields would also qualify them for inclusion in most income portfolios.
“These are all growth-style businesses with high cash generation and return on capital that is allowing them to offer a growing dividend stream,” adds Cross.


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