Normally a high return signals at least the likelihood of a cut dividend, perhaps no payment at all or even acute danger. Indeed the higher the yield the greater the risk.
The latest FTSE shake-up underlines the way the market has lost sight of simple attributes such as profits and dividends. The groups bundled out of the blue chip index this week are making handsome, although not spectacular, profits headway and, in the main, increasing dividend payments.
Gallaher, the cigarette group, is one of the ex-FTSE trio. Its shares offer a yield of more than 7 per cent. In part this is due to the realisation over recent weeks that the group's FTSE status was under threat with the consequent erosion of confidence as FTSE tracker funds bailed out.
But not so long ago 7 per cent indicated all sorts of possible disasters. Yet Gallaher is trading well. Although profits were down, the cigarette company still made pounds 318.6m and should do better this year. More importantly it will have no trouble holding its dividend.
Safeway, the supermarket chain, was another FTSE casualty. Here profits should be marginally ahead, say pounds 355m against pounds 340.2m. But the dividends should at least be held, providing a 7 per cent-plus yield. To add to the investment appeal, Safeway has aroused predatory instincts. Asda would have liked to agree a merger, but Westminster's attitude was the stumbling block. And Wal-Mart, the huge US retailer which has been linked with a host of chains in this country and Europe, could settle for Safeway's undoubted charms.
Tomkins, the out-of-favour buns-to-guns conglomerate, also yields more than 7 per cent. The group has cash to burn, hence its current tender offer to mop up pounds 400m.
I am not suggesting any of the three relegated shares are about to go storming ahead. Trading prospects are not sufficiently exciting. It would need a take over bid to light any fire. But any investors who regard a good return as an important part of their portfolio policy should think in terms of the sounder high yielders.
Most of the high yielders are outside FTSE. But FTSE constituent, National Power, offers almost 7 per cent. However its apparent generosity may not be all it seems. There is, in some quarters, a queasy feeling it may in a few years find it necessary to cut its payment. However BT Alex.Brown disagrees. The investment house sees the privatised generator achieving a progressive dividend policy.
In the lower reaches of the market, yields can achieve Ruritanian levels. Even double figure returns lurk. However they are likely to be something of an illusion. A dividend cut is normally to be expected with such an offering.
Little Leeds Group, a textile business, has been offering a fancy return for a long while. Its rating shouted that a dividend cut was inevitable. In the event, it held its payment although profits fell by around a third.
If Leeds, admittedly operating in one of the toughest industries, can hang on again - and there are those who think it will - then it will make the ultra-safe returns offered by special savings accounts like those of, say, the Halifax, look like dead money.Reuse content