Safety in Dividends?

10/13/2008 2:12 pm EST

Focus: GLOBAL

Chris Gilchrist

Editor, The IRS Report

Warren Buffett, chairman and CEO of Berkshire Hathaway and the world’s most successful long-term investor, memorably once said that his job was to sell greed and buy fear.

By this he meant that it is usually right to sell when everyone has a rosy view of the world and can only see things getting better, and it’s usually right to buy when everyone is terminally gloomy.

So in putting $5 billion into Goldman Sachs in the middle of a banking crisis, Buffett is certainly taking his own medicine. Should you take some, too?

Recently, several pundits pointed out that the average income you get from UK shares is now higher than the income you get from lending money to the government for the long term. The last time this happened was in 2003, just before a big upturn in the stock market.

In the long run, companies increase their dividends, usually at above the rate of inflation, so the terms of trade are very much in share investors’ favor when they can get such a high income from shares.

Of course, you have to collect that income, which is why we have the fear and panic today—nobody is sure the banks will pay their dividends. But others will almost certainly do so—utilities like National Grid (NYSE: NGG) and British Telecom (NYSE: BT), drug companies like GlaxoSmithKline (NYSE: GSK), and phone companies like Vodafone (NYSE: VOD), not to mention hundreds of lesser-known businesses.

Remember that even if share prices fall, the vast majority of companies will go on paying dividends. And if dividends rise as they have in the past, the actual income return on your original investment will rise steadily over the years. It’s this rising income that explains why shares have always been the favored investment of really long-term investors like pension funds and life insurance companies.

And here is a short list of big UK companies whose dividend payments look pretty secure:

HSBC Holdings (NYSE: HBC), 5.1%, Banking
BP (NYSE: BP), 8.3%, Oil
BT Group (NYSE: BT), 14.8%, Telecom
National Grid (NYSE: NGG), 8.1%, Electricity
GKN (LSE: GKN.L), 8.0%, Engineering
IMI (LSE: IMI.L), 5.3%, Engineering
Vodafone (NYSE: VOD), 10.4%, Telecom
Inchcape (LSE: INCH.L), 9.6%, Motor distribution
Ladbrokes (LSE: LAD.L), 8.1%, Gambling
Legal & General (LSE: LGEN.L), 6.9%, Insurance

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