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Spend & Save

Investment Insider: Don't forget growth if you are tempted by yield from dividend

Two thirds of the UK economy is dependent on consumer spending

In times of low interest rates, dividend yield is likely to become even more attractive for investors.

After all, bond yields and interest on savings accounts are unlikely to provide a lucrative income stream.

Currently, the yield on short-dated, two-year US treasuries is just 0.3 per cent and two-year gilts are yielding less than 0.5 per cent.

By comparison, almost every FTSE 100 company is expected to yield more than short-dated government bonds. Some of the more attractive dividend payers include cigarette makers Imperial Tobacco and British American Tobacco. Others are utility companies such as SSE, which is expected to yield some 6 per cent, and Centrica, which has a prospective yield of 5.5 per cent.

While a focus on yield might appear attractive if interest rates remain low, it could be a mistake to dismiss the prospects for growth altogether. An economic cycle is precisely that – a cycle.

Consequently, the time to look for companies which could benefit from the upturn in the economic cycle is before the growth has taken place. These could include banks that tend to do well when the economy recovers. Currently, Barclays, HSBC and even Standard Chartered are only valued at around 10 times earnings.

The outlook for retailers might also improve as economies return to growth. Two-thirds of the UK economy is dependent on consumer spending. As consumer confidence improves, so should consumer spending.

When looking at opportunities, it is often easy to pigeon-hole companies into either income or growth, but the long-term, total return that investors enjoy is made up from dividends and capital appreciation. Both are equally important.

David Kuo is director at fool.co.uk.