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MARKET COMMENT
Proof That High Yield Works

By Maynard Paton (TMFMayn)
July 14, 2004

High yield works. Statistics from the FTSE 350 suggest good dividend-paying shares win out over the short and long term.

The proof is based on year-end data for the FTSE 350, FTSE 350 High Yield and FTSE 350 Low Yield indices from 1985 through to 2003. The FTSE 350 index consists of the largest 350 companies on the London market with the highest yielders representing the High Yield benchmark and the remainder making up the Low Yield.

The following summarises the out-performance:

* Over one year: The FTSE 350 High Yield index beat the Low Yield and main 350 indices thirteen times out of eighteen.

* Over five years: The FTSE 350 High Yield index beat the Low Yield and main 350 indices eleven times out of fourteen.

* Over ten years: The FTSE 350 High Yield index beat the Low Yield and main 350 indices eight times out of nine.

This table shows the average gains over one, five and ten years:

Average gain            FTSE 350 FTSE 350
High Yield
FTSE 350
Low Yield
Over one year (%) 12.2 14.6 9.8
Over five years (%) 85.1 97.2 74.1
Over ten years (%) 258.1 304.3 218.6

It's worth remembering the market has improved in thirteen out of the eighteen years since the end of 1985, a period very suitable for low yield (and no yield) 'growth shares' to flourish. Yet, amazingly, only at the end of 1999 and the last hurrah of the dotcom bubble had the low yielders outrun their high yield cousins over any ten-year period.

As well as holding their own in bull runs, high yielders can of course offer protection in bear phases. During the five negative years experienced since 1985, the high yielders on average lost 4.4% per annum while the FTSE 350 lost 11.4% and the low yielders lost 18.3%.

All this backs up the fact that re-invested dividends (which the above data accounts for) can boost returns significantly. As every stock market connoisseur knows, about half of the 11% annual average return from shares since 1918 has come from company payouts.

Of course, growth shares will return to favour in time and can certainly produce sizeable gains in the short term. But history indicates buying companies with attractive and sustainable dividends does seem the better long-term option.

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