This is a guest post from The Investor, the publicity-shy blogger who writes about money and finance on Monevator. If you like this post, why not subscribe to his free RSS feed for similar posts on money and investing topics? You may also follow him on Twitter @Monevator.
Why North American investors should buy UK shares for income
Investors around the world who want to invest for long-term dividend income should take a look at the UK stock market.
While most readers will be familiar with London’s famous red buses, our bands ranging from The Beatles to Radiohead, and even our former Prime Minister Tony Blair, fewer will probably know of the attractions of our stock market.
The FTSE 100 – the index of the top 100 companies in Britain – pays a higher average dividend yield than most of the world’s major markets, even after big dividend cuts recently due to the troubled banking sector.
High yields shares aren’t a flash-in-the-pan for London, either, but rather a long tradition in UK investment – perhaps because our interest rates tend to be higher than elsewhere, too (although they’re not right now!)
Where does the UK rank in global terms for income?
Here’s the dividend yield on several countries’ stock markets (as of August 25th, 2009, from the Financial Times).
New Zealand…….5.6%
Australia………….5.0%
UK………………...3.6%
Germany…………3.3%
Canada…………..2.9%
Japan…………….2.0%
US………………..2.0%
As you can see the UK is only beaten on market yield by Australia and New Zealand.
The UK companies are on a different scale to those Down Under, though (disregarding a few Australian mega-miners). London-listed HSBC is the world’s largest bank; Glaxosmithkline is the world’s second largest drugsmaker; and BP and Shell are true giants in the oil space.
Now is a good time to buy in to the UK market
I think there’s a good chance the UK dividend payout will actually rise over the next couple of years, as our banks get back into shape.
And if you’re buying with Canadian or US dollars, now could be a great time to buy into this market for the long-term.
The Canadian dollar is near a five-year high against the UK pound.
As for the US dollar, the UK pound has recovered somewhat since the start of the year – British pounds hadn’t been so cheap for US buyers for decades — but at £1:$1.63 it’s still well below the £1:$2 level reached a few years ago.
Exchange rates are notoriously hard to predict, but it’s definitely true to say currency risk works both ways.
Buy UK shares now, and you’ll likely get a decent yield when converted back into your own currency for years to come, with the chance of a capital or income gain if the pound returns to its usual position of strength as the economic crisis passes and our interest rates rise.
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