Today's Strong Buy Signal For Blue-Chip Dividends

Published in Investing on 7 November 2011

The last time it flashed, income shares outperformed for nine years.

Amid all this year's panic about Greece, US debt downgrades and falling markets, a strong buy signal has emerged for seekers of blue-chip dividends.

Woodford 'bounceback' alert

The signal itself comes from Neil Woodford, who works for Invesco Perpetual and runs the firm's High Income and Income funds -- and at the last count controlled about £19 billion of client money. For most people, Mr Woodford is the country's leading exponent of successful, high-yield investing.

Anyway, following two years of lagging the All-Share index, Mr Woodford's portfolios currently enjoy a healthy lead over the market for 2011...

...and significantly for us, the last time Mr Woodford enjoyed this scale of 'bounceback', his dividend-flush portfolios carried on to beat the market for nine consecutive years.

Mr Dividend

Mr Woodford has one of the best long-term records in the business, as the following table illustrates:

Years to
October 2011
All-Share index
total return
Woodford
total return*
511%21%
1073%178%
1546%386%

(Source: Bloomberg. *average of High Income and Income funds)

Importantly, he's achieved that level of proven success not through taking higher-risk bets on turnarounds, blue-sky growth stories, obscure small-caps or gold stocks, but instead through collecting healthy income yields from strong dividend-paying blue chips.

In particular, Mr Woodford has generated substantial returns over time from tobacco shares such as British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT), and his current income favourites include AstraZeneca (LSE: AZN), GlaxoSmithKline (LSE: GSK), Vodafone (LSE: VOD) and BAE Systems (LSE: BA).

Out of favour

Similar to most investors, however, Mr Woodford occasionally experiences periods of underperformance. The classic example was during the late 90s, when dotcom growth shares were all the rage and the stable, 'old economy' stocks that Mr Woodford favoured were ignored en masse. In fact, Woodford lagged the All-Share for two full years:

YearAll-Share index
total return
Woodford
total return*
199814%9%
199924%11%

(Source: Bloomberg. *average of High Income and Income funds)

But the dotcom bubble eventually burst and the market quickly rediscovered its liking for reliability and dividends. Mr Woodford's funds then went on to record nine consecutive years of index-beating returns:

YearAll-Share index
total return
Woodford
total return*
2000-6%18%
2001-13%2%
2002-22%-11%
200321%24%
200413%21%
200523%27%
200617%27%
20076%7%
2008-30%-19%

(Source: Bloomberg. *average of High Income and Income funds)

As you'll see from the table above, Mr Woodford and his blue-chip portfolio fared well during the dotcom crash of 2000-2002 and the banking collapse of 2008. But he could not compete with the 'dash to trash' rally of 2009 and the follow-on recovery of 2010, during which time numerous struggling shares surged and Mr Woodford's 'safe havens' could only stand on the sidelines:

YearAll-Share index
total return
Woodford
total return*
200930%10%
201015%11%

(Source: Bloomberg. *average of High Income and Income funds)

But amid all the panic about Greece, US debt downgrades and falling markets, history now seems to be repeating itself:

YearAll-Share index
total return
Woodford
total return*
2011 to date-4%7%

(Source: Bloomberg. *average of High Income and Income funds)

So right now we have...

...Mr Woodford having once again lagged the All-Share for two years...

...the market now looking to have rediscovered its liking for reliability and dividends...

...and Mr Woodford's funds once again having performed well in a tough market.

Another nine years of beating the index?

Of course, there are no guarantees with investment. Mr Woodford's past performance may not be a reliable guide to the future, and plenty could still happen during 2011 to leave his portfolios trailing the wider market for three years in a row.

But it's difficult to ignore Mr Woodford's illustrious track record, his bouncing back to form, and these comments from March, when he claimed: "I believe investors think I require significant economic headwinds in order for my funds to perform, but in reality I am invested in some of the best quality companies in the UK stock market on ludicrously cheap valuations. In my opinion, this is the best investment opportunity since the tech bubble in 2000."

If Mr Woodford was right -- and March 2011 was indeed the best opportunity to buy blue-chip dividends since 2000 -- then perhaps we really could see high-yield blue-chip portfolios outperform for another nine years.

More on the markets, shares and the economy:

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Comments

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mcturra2000 08 Nov 2011 , 11:10am

Interesting article.

eccyman 08 Nov 2011 , 1:32pm

We quite rightly hear a lot about Neil Woodford, the guy's done great for me and has literally transformed my personal finances.

However I'd like to hear something of Terry Smith who also operates much in the Woodford mode...

ngata 08 Nov 2011 , 1:36pm

AstraZeneca are particularly tasty today with overselling by depressed investors worried about a cure.

Just topped my own ISA up with more. They'll yield nicely.

spirited1 08 Nov 2011 , 3:38pm

I read this with interest, and then looked at the relevant website. Two things to note here - the fund's own calculation show that their charges will amount to about 3% a year - 6% return this year means 3% in reality, so why take all that risk? Safer to leave it in Tesco bank account currently paying about 3%. Also 20.8% of the current fund is invested in tobacco companies - people lured by your headline need to factor that in as well.

andrew97d 08 Nov 2011 , 4:13pm

Terry Smith was interviewed on the Today program, one
Saturday at the beginning of July. He said there was a
crash coming in Euroland and had sold most of his
holdings apart from Unilever, Personal Assets (15% in
gold) and not much else. The following monday the
big sell-off started.
@Spirited1. Why get 3% in tesco bank when you get
6% dividends on many blue chip stocks and some
growth as well. Utilities will not suffer until base rate
goes up, and that is years away.

eccyman 08 Nov 2011 , 5:18pm

#andrew97d

Think you've made a mistake. Terry Smith only made one appearance on the Today program in July. It was on the 29th a Friday.

He makes great play of the need to curb public spending but explicitly states he remains a holder of equities

http://www.terrysmithblog.com/straight-talking/terry-smith-in-the-media.html

spinquark 08 Nov 2011 , 7:46pm

spirited1,
Don't understand your figures, where do you get 3% per annum fund charges from exactly? Are you using the table in the simplified prospectus which seems confusing and possibly misleading?

If you buy through a fund retailer such as Hargreaves Lansdown there is no initial charge and some of the annual management charge is rebated, leaving an annual charge of 1.25%. It would cost you 0.5% stamp duty plus dealing charge to initially buy said shares directly and then your own time to manage the portfolio. Perhaps I don't understand the full underlying charges, but if so perhaps spirited1 or someone can explain where I am going wrong.

As to "Why take the risk?". The income units pay out about 4% I believe and this has a chance of rising each year. This 4% is tax free within an ISA, whereas your 3% in the bank is taxable. With inflation at 5% money in the bank at maybe 2.5%pa after tax is shrinking at 2.5% every year guaranteed. These units have a chance of avoiding that and potentially realising some real gain. Take your pick - a guarantee that you will be 15% poorer in 5 years - or a reasonable chance or being 15% better off ?

HilaryHames 08 Nov 2011 , 7:48pm

Spirited1
You could also invest in Woodford's Edinburgh Investment Trust where thecharges are .6% although there is a performance charge based on the amount that the fund beats the ftse allshare.

http://itinvestor.invescoperpetual.co.uk/portal/site/ipitinvestor/investmentrange/investmenttrusts/edinburgh?gclid=CPGy3N7mp6wCFUEPfAodo3wQ-w

although I know that you can still get a better dividend with shares at least a fund or an investment trust spreads the risk, i personally was badly burnt with Lloyds as I was very green and didnt get out quickly enough

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