My regular weekend reflection on investing, followed by some good reads from across the web.
I mentioned yesterday that I thought BP shares were a good buy at 435p, but that there were certainly risks to buying.
The biggest short-term risk is that BP’s dividend is cut or suspended, even if it has the cashflow to support it as well as its clean-up commitments. Politics or PR might force a gesture.
A dividend cut or suspension would have implications for all UK investors, not just BP shareholders. Roughly £1 in every £6 paid out by UK shares comes from the oil giant.
This also has an implication for whether the FTSE is currently cheap compared to the risk-free rate of return from UK government bonds, aka gilts.
As of last night:
- The yield on the 10-year gilt was 3.59%
- The yield on the FTSE All-Share was 3.51%
One way of judging their relative value for money is to divide the gilt yield by the equity dividend yield:
- Gilt to equity yield ratio = (3.59/3.51) = 1.02
That low ratio would normally be very bullish for UK equities. The average since the 1950s has been closer to 2, and most times it has dipped below 1 it’s been a very positive for shares (September 2008 was a big exception).
What if BP entirely suspended its dividend? That would reduce the FTSE All-Share yield to below 3%, and push the gilt/equity ratio over 1.2.
Shares would still look pretty cheap on the measure, but they would be more vulnerable to, say, long-term interest rates inching up.
From the blogs
- The calculus of cats and dogs – Get Rich Slowly
- Does paying people more get better performance? – Simple in Suffolk
- How to sell your own home in 30 days – Wealth Pilgrim
- Anatomy of a growth investor – The Psy-Fi blog
- How much money do I need to retire? – Oblivious investor
- A tax on people who can’t do maths – Bad Money Advice
- Investing mistakes I have made – Retirement Investing Today
- Only the poor say money doesn’t buy happiness – Financial Samurai
- Autologic shares under the spotlight – iii blog
- How to make $400 and lose 10 pounds – Planting Dollars
- Radical unschooling – The Digerati Life
- The Australian property bubble – Stock Tickle
From the big boys
- Five unexpected costs in retirement – Yahoo Finance
- Controlling the finance sector’s excess returns – Buttonwood
- Buy a forest – FT
- Banks tighten interest only mortgage rules – FT
- Holidays where the weak pound goes further – FT
- John Lee writes to George Osborne with CGT proposal – FT
- 25% CGT a line in the sand for Tory MPs – Telegraph
- Charlie Bean of the MPC reassures on inflation target – Telegraph
- Fleeing Facebook – The Economist
- Nigerian oil agony dwarfs Gulf spill – The Guardian
- Fun and games with smallcap oil explorers – Motley Fool
- Futuristic vending machines – The New York Times
Subscribe to Monevator for free to get this list every Saturday!
Comments on this entry are closed.
Thanks for the link! 🙂
Also, I’ve been curious for a while: Why do you use the site name for the link text rather than the article title?
.-= Mike Piper on: Investing Blog Roundup: Retirement Planning and Investing Terminology =-.
I just don’t think that the dividend will be sustained. They will cut the shizam out of the dividend so you can’t look at it from that angle, although it is enticing to do so!
.-= Financial Samurai on: Only The Poor or Super Rich Say, “Money Can’t Buy Happiness” =-.
@FS – Yeah, if I was forced to bet I’d imagine they’d halve it for a year or two, mainly for political reasons.
@Mike – You’re welcome! Regarding the link style, I just hate long pages of links really, and find this more elegant. I link off the article title or similar from within articles, but all on one page looks ugly. (I don’t think there’s much PR loss to the recipient site, because I don’t think these linkfests have much page rank to give due to dilution).
Okie dokie.
And, congrats on 1,000 subscribers! 😀
.-= Mike Piper on: Can I Retire Yet? (And Other Retirement Planning Questions) =-.
I hadn’t noticed – thanks Mike! 🙂