Warren Buffett, boss 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?
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Shares beats saving
This week, 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’ favour 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 and British Telecom, drug companies like GlaxoSmithKline and phone companies like Vodafone, not to mention hundreds of lesser-known businesses.
Back in August, I identified five unit trusts investing for income that paid over 5% and a short list of blue chip shares that also paid high dividends averaging 7.8%. Thanks to the decline in prices since then, income yields have risen, so here is a new list of five funds paying over 6%:
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| Liontrust First Income | 6.3% |
| Martin Currie UK Equity Income | 6.0% |
| M & G Dividend | 6.0% |
| New Star Equity Income | 6.3% |
| Newton Higher Income | 6.2% |
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 favoured investment of really long-term investors like pension funds and life insurance companies.
Ten shares paying over 5.5%
And here is a shortlist of big companies whose dividend payments look pretty secure:
| Company | Dividend Yield | Sector |
| HSBC | 5.6% | Banking |
| BP | 6.0% | Oil |
| BT | 10.8% | Telecoms |
| National Grid | 5.9% | Electricity |
| GKN | 6.9% | Engineering |
| IMI | 5.7% | Engineering |
| Vodafone | 6.5% | Telecoms |
| Inchcape | 8.0% | Motor distribution |
| Ladbrokes | 7.5% | Gambling |
| Legal & General | 6.0% | Insurance |
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In conditions of fear and panic, there’s no knowing what will happen to share prices. But only a big slump in profits would cause these companies to cut their dividends, and – as yet - nobody is predicting that will happen.
I know several canny investors who have been buying shares in recent days. Their technique is not to pile in all at once, but to buy steadily over days and weeks in small bite-sized chunks. These guys know they are not smart enough to know when the absolute bottom of the market has been reached.
They also know that when the market rebounds from its low, it’s likely to do so very quickly, so that if you wait until you’re sure the market is headed up, you can easily miss the first 10-15% of the rise. That’s why it pays to buy fear - even though it hurts.
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Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
