For money happy returns

PUBLISHED : Monday, 16 January, 2012, 12:00am
UPDATED : Monday, 16 January, 2012, 12:00am


In a week when the money markets have yet again shown that decent investment yields are hard to find, we see that bank deposit rates remain truly miserable, yields on better quality bonds are falling and other monetary instruments also offer meagre returns. So, it's hard to even retain the value of an investment after taking inflation into account. The one bright spot, however, is yields on equities.

The Hong Kong stock market is offering an average historic yield on shares of just below 4 per cent. This is impressive compared with those of other major markets. Shares in the US, for example, are trading on yields of about 2.2 per cent; in London, the average is 3.4 per cent.

None of these figures is particularly exciting, and dividends are rarely the point of buying shares. However, current conditions invite some reconsideration of equities' yield-paying proposition.

Among Hong Kong blue chips, many shares are trading on quite extraordinary yields. The Swire group has long been a notable profit distributor and it remains so, with the historic yield on Swire Pacific shares reaching close to 9 per cent, accompanied by a 7.3 per cent yield on the shares of its associate company, Cathay Pacific.

Generally speaking, however, the highest yields are to be found in bank shares. The top of the tree in the yield-paying stakes are Bank of China and its sister, Bank of China Hong Kong, which are both yielding comfortably over 6 per cent. Hang Seng Bank, long favoured for its steady growth and yield, is close by with a historic yield of 5.6 per cent. Its parent, HSBC, is at 5.7 per cent. (This is unusual.)

Before you get carried away with these figures, it should be noted that share yields and earnings for the individual investor are two quite different things. Without wishing to insult your intelligence, it is worth pointing out the yield is relative to the current share price. But as far as individual investors are concerned, the interest-earning potential of a share must be attached to the price at which they bought the counter.

So a share bought at, say, HK$100 and paying a yield of HK$10 is giving the shareholder a 10 per cent rate of interest, regardless of whether the share price has risen to, say, HK$120, which would produce a lower yield figure.

This is obvious but often forgotten when investors look at share yields. Indeed, it is often the case that some of the worst performing shares offer high yields precisely because their prices are depressed and, therefore, their last dividend payments look impressive. A case in point is the battered Esprit shares, which are on a historic yield approaching 10 per cent.

Keen share traders pay little attention to yields, not least because they are unlikely to be around when dividends are paid out.

However, longer-term investors, who are prepared to take a sanguine view about share price fluctuations, might well focus on yields because as long as they are not trading their shares they are collecting dividends, which, in current circumstances, offer returns beating most other investments.

The great folly, which often catches unsuspecting shareholders, is offers of more generous payment of dividends in scrip; in other words, by way of additional share allocations in lieu of cash. The problem with this is that it almost always leaves investors with odd lots of shares that are difficult to sell and always ends up with the shares being sold at prices lower than those prevailing in the market.

Equity yields have come back into fashion as an investment theme, whereas in a booming market, dividends paid by companies are something of a sideshow, as greater rewards are seen coming from capital gains on share investments.

The irony at the moment is that while equity markets are far from booming, corporate profitability remains strong, giving companies the incentive to pay more generous dividends. This tendency is accentuated in an environment in which companies are reluctant to make large investment commitments and, therefore, find it hard to justify hoarding cash.

Many listed companies - especially in Hong Kong, where the largest shareholders are the company's directors - prefer to distribute their cash as dividends. As shareholders, they directly benefit, but so do the minority shareholders.