A quick look at dividend yield rates on FTSE 100 stocks at present does not paint a pretty picture c...
A quick look at dividend yield rates on FTSE 100 stocks at present does not paint a pretty picture compared to the best rates being paid on savings accounts by banks and building societies.
Trying to get an annual income from investing in even a solid cash generating business such as BOC would require an extremely large investment at present.
For example, to get an annual income of around £30,000 from dividends paid by BOC would require holding around £750,000 worth of shares at a share price of £9.
Anybody with that amount of cash walking into a high-street bank could probably negotiate at least a 6% compound interest rate, some 2% better than the current yield on BOC shares.
Those in favour of investing in the stock market will point out that earnings have dropped to levels below historical averages in many cases, along with share prices as the bear market pushes into its third year.
Once earnings recover, yields will rise and once again outperform the income possible by relying solely on compound interest paid by profit-hungry high-street banks, they argue.
There is a problem with this view, however, because it does not take into account the biggest threat to yields to emerge since the Japanese started spreading just-in-time and total quality management theories around the globe: deflationary pressure expanding beyond the borders of China.
The country has been a target for direct foreign investment for the good part of twenty years now, but having been accepted into the global trading community through membership in the World Trade Organisation, China is set to attract such investment at an ever-increasing rate.
And at the same time it will expose its economy to the outside world at an unprecedented level.
China has a virtually unlimited supply of cheap labour that can be put to work in the manufacturing sector, and this is just what is happening,. according to people such as Michael Watt, who manages the Henderson TR Pacific investment trust.
"China is becoming increasingly important," he said recently when the trust reported its latest half-yearly results.
The average investor could be forgiven for thinking: So what?
The fact that manufacturing is cheaper in China does not mean an iota of difference to services companies selling in, say, the UK market.
This would be true if the services sector of the economy was truly separated from the manufacturing sector.
However, as has been shown by the struggles by the wise and good of the Bank of England's Monetary Policy Committee, this is only possible in theory.
In practice it is impossible to split the effects of manufacturing from services when it comes to issues such as setting interest rates and calculating overall rates of inflation.
So, how does this relate to yields and investment returns?
Put simply, if companies are forced to chase lower manufacturing costs in China, they will also be chasing lower sales prices on the goods they sell.
Such deflationary pressure exported around the world is almost guaranteed to result in slower earnings growth, or even falling earnings.
And that in turn would put pressure on yields.
Of course, there are many arguments as to why this might not be the case, not least of which is the fact the yield is simply a measure of the relationship between earnings and the price of shares in the company concerned, as in: if the share price falls, the yield increases.
But the Chinese influence is likely to be a long-term issue that cannot be undone by short-term share price falls boosting perceived yield rates.
The corollary of these changes is that investing in Chinese manufacturing conglomerates should be a good thing at present - which would be true except for the still fickle nature of the local regulatory regime.
For UK investors the coming change is going to make investment strategies all that more difficult, particularly for those who still feel that parking one's money in big FTSE stocks is a sure way to earn more money than parking the same money in the bank.
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