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By Holly Cook| 5-28-2012 12:00 AM

Look to UK Dividend Stocks for the Best Returns

The returns offered currently by UK dividends are amongst the best you'll find, says author and long-term investor Rodney Hobson

Holly Cook: I am joined today by Rodney Hobson, former editor of Hemscott and author of several investing books, most recently The Dividend Investor, and of course a long-time investor himself. Thanks very much for joining me, Rodney.

Rodney Hobson: My pleasure.

Cook: Now today we want to talk about dividend investing. These have been really popular for income seekers for a very long time, but given the current low yield environment, they are becoming something of a hot topic. Do you think we should be worried that there is perhaps a dividend bubble or has the argument for investing in dividend stocks remained the same?

Hobson: The argument, it remains the same. I don't accept the argument that this is a low-dividend environment. In fact, one of the great attractions to me is that there are very juicy dividends available from really solid companies. 4% is the norm. Now, you can't get that out of a savings account. Even an ISA Cash won't pay you as much as 4%. You can get 5% [in dividend stocks]. Even Vodafone has been up to 8%. What on earth is going on? Why are people worried? There are terrific dividends to be had there and you just can't get that kind of return from any other investment.

Cook: So you mentioned Vodafone, that's one of the kind of slow and steady stocks. Would you rather look at perhaps large-cap companies who have proven history, or do you think that it's worth looking at perhaps sort of lesser known stocks, like small caps that have more growth potential?

Hobson: I personally prefer to look at the slow and steady stocks. And for private investors I think that is the right attitude, because as you say, this is a difficult environment, share prices are going up and down, what you want is the solid dividend payers, defensive stocks, GlaxoSmithKline is another example, Shell has done very well, Sainsbury's has done well. These are good solid companies, well known names, they don't fall far when the share price comes down. They are paying good dividends. I think these are lot better, but it depends on what you're looking for.

If you're a longer-term investor and you want a good solid yield, that is what you go for; if you're looking for a shorter-term investment, something that will really take off, well, yes, it's great as long as you understand you are taking a greater risk and some of the smaller companies will fail.

So, that's the risk you take, as long as you know what you're doing, decide what amount of risk you want to take, what you want from your shares, are you looking for a quick gain, are you looking for the dividend. Most investors fall down because they forget what it is they want, or they don't even think about what they want before they invest. Think it through.

Cook: Okay. So, let's assume that perhaps you're a long-term investor, but you're not exactly sure what it is you should be looking for, but you're looking for this income portion of your portfolio. What would you say are some of the main characteristics that stand out about reliable dividend payers?

Hobson: Go on to a company's website before you buy the shares; look at the five-year dividend payments and see how the movement is going. Now, there's always a warning that you shouldn't rely on the past to forecast the future, but it is actually your best, most reliable guide. If a company is managing to increase sales, profits and dividends year-on-year, the chances are it will continue to do so. You’ll want some argument to tell you that this is going to come to a rapid stop.

On the other hand, if a company is just dawdling along or declining, you would want a very good reason to invest because it's likely to continue to decline unless something changes, new management comes in or new product comes out or whatever. So you'd want a good reason to. So the past is a very reliable guide to what is going to happen in the future. History doesn't repeat itself exactly.

Cook: Several companies got very negative press during the downturn when they actually cut their dividends. Would you sort of write those off because perhaps management wasn’t strong enough to be able to maintain the dividend or do you think there's opportunity there for some of those companies that are now strong enough to start repaying and potentially growing their dividends?

Hobson: Yes, rebasing the dividend as it is euphemistically put, was another word for cutting it, is bad news obviously. I would be particularly suspicious of any company that reduces its dividend is likely to reduce the dividend again, I'm afraid is always possible. Certainly, if the dividend is scrapped I wouldn't touch it with a barge pole. If the dividend is reduced, there is some implication that perhaps that is it, and that the company will now start to recover. One example of a company reducing its dividend but then starting to grow it again a few years ago was Scottish & Southern [Energy]. So you need to look at the company more carefully, decide if you think there is a chance for the dividend to start moving again, and then it can be a good, cheap investment because you are coming in at a much lower share price. You also have to be satisfied that the fall in the share price fully reflects the increased risk. Just because the shares have fallen a bit doesn't mean it's a good investment. You want to be satisfied that that really has hit the bottom.

Cook: You've mentioned several companies like Glaxo, Shell, Scottish & Southern. Tell us a bit about your portfolio, are these some of the dividend payers that you hold and what would be your favourites?

Hobson: I hold Glaxo and I hold Shell. I hold Sainsbury's, Vodafone. These companies are paying solid dividends, really good yields. Glaxo was paying about 6% yield when I bought it. Vodafone was something similar. Shell was about the same. These are all companies, well known names. I'm a very cautious investor. I don't take risk. I'm not interested in risks. I do want dividends and I am a long-term investor. I'm quite prepared to ride out the fluctuations of the stock market. So these are all companies that are, all the companies in my portfolio are well-known names, solid companies, companies paying dividends, companies where I feel they will continue paying dividends. There are very few exceptions to that. I have to say I took a chance on Hornby, which has not worked out well at all. They have just recently cut their dividend and that has not proved a good investment. I also bought Barratt Developments when Barratt was not paying a dividend. Looking forward to that being restored soon, I hope. I have held on for about four years now and kept hoping that the dividend would come in, but I'm prepared to hang on. So, I've taken one or two little chances as long as the main part of my portfolio is really solid, and let me say the ones that I think are more of a gamble I've got very small holdings in, much lower than the holdings for other companies.

Cook: So, if you were to start your investing career, if you want to put it that way, all over again, you hadn't already built up holdings in some of these companies, are there any companies that you don't hold that might be kind of top of your list?

Hobson: I have to say, if I thought a company was a good investment it is in my portfolio. BT is a possibility. I would look at BT now. I think BT has got its act together, much better over the past two or three years. So that would be a possibility, but I still prefer Vodafone. I think it's generating an awful amount of cash as those people who think it should be paying more tax will verify. So on the whole, yes the companies I like they are in my portfolio.

Cook: Well, you've given us some really great ideas there. Thanks very much for joining us, Rodney.

Hobson: It's been terrific to talk to you.

Cook: Thank you. For Morningstar, thanks for watching.


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