Right now, the stock market is all about numbers. The wrong numbers. As traders’ screens flash red, the headlines are all shouting about how much money is being wiped off global stock markets.
It is easy to be distracted, given how dramatic the figures are. The FTSE 100 lost £91bn on Black Monday, its worst trading day in four years. Then the Dow lost 1000 points on opening, its worst start on record. More than $5tr has been wiped off global stock markets since 11 August, less than two weeks ago.
As always, it pays to look behind the headline numbers, to get a more rounded picture of what all of this really means to investors. And when you do that, some surprising numbers emerge.
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Yield To The Yield
The current meltdown is certainly unnerving, but it is also throwing up some thrilling figures as well. Like this one: the average yield on the FTSE 100 is now 4.4%.
Now that’s a number I like. It means that if you buy a FTSE 100 tracker, you are hooking into an income of 4.4% a year, one that is likely to rise in future. By comparison, the average savings account pays just 0.65%. Base rate is 0.5%. And the CPI rate of inflation for July was just 0.1%. In other words, buying the UK’s benchmark index through a low-cost tracker will give you an income worth an incredible 44 times current inflation.
If you prefer to buy individual large cap FTSE 100 stocks, which include the biggest and most solid companies in the UK, you can secure an even more insane yield. The yield is calculated by dividing the company’s dividend by its share price. So if the dividend is 5p, and the stock trades at £1, it yields 5%.
When share prices fall, yields rise. And when shares plunge violently, yields soar just as violently, which is exactly what is happening right now.
Golden Years
Mining giant BHP Billiton is down 28% in the last six months alone. It now yields a juicy 7.5%, which is 75 times inflation. And this is supposed to be a growth stock. Oil majors BP and Royal Dutch Shell are both down over 20% in the same period, and yield more than 7.3%. That is sheer black gold. Now these stocks are risky right now, given the commodity price slide, but the rewards have also risen proportionately.
Global banking behemoth HSBC Holdings has been hit particularly hard, given its exposure to China, but after falling 14% in six months it now yield 6.45%. That’s right, almost 65 times inflation. GlaxoSmithKline yields more than 60 times inflation. SSE yields 59 times inflation, Vodafone yields 50 times. I could go on.
These yields aren’t guaranteed, but that is a chance you take.
Dream on
The last six or seven years are accepted as a disaster for savers, by wiping out the returns on cash. But today’s no-inflation world is redressing the balance with a vengeance, especially for long-term investors willing to accept short-term stock market turbulence. This week’s crash is an income-seeker’s dream.
I can’t remember a time when dividends offered such an inflation-crushing return. If inflation was at 2%, the Bank of England’s supposed target, that FTSE 100 tracker would need to yield 88% to maintain the same inflation-to-yield ratio. BHP Billiton would need to yield 150%.
These are crazy figures, but as the events of this week have shown, we live in an age of crazy numbers. Top FTSE 100 stocks yielding between 50 and 70 times inflation is one of the craziest of all. And for those wondering whether to brave today’s turmoil, one of the most tempting.
