Dividends are the key to a sensible investment strategy

Dividends are the key to a sensible investment strategy
As we entered 2009, no one would have predicted the strong rally in the FTSE 100, which is now up 22pc as we approach the end of the year.

By Garry White
Published: 7:32PM GMT 26 Dec 2009

In fact, sentiment was so grim that the FTSE 100 fell by almost a quarter over the first three months of 2009.

Questor has therefore been particularly defensive over the last year and focused on yield plays, recovery shares and defensives. This strategy has proved sound, with some real successes, although there have been one or two less than perfect calls along the way.

A dividend strategy should be the cornerstone of any sensible investor's portfolio. Various studies have suggested that more than 70pc of the long-term return in a portfolio is generated by reinvested dividend payments. In the UK we have some of the highest-yielding shares in the world – and UK investors should continue to exploit this.

Yield plays over the last 12 months include National Grid, Northern Foods, Imperial Tobacco and Primary Health Properties. All of these shares remain buys as we enter 2010.

The mining sector has proved lucrative as commodity prices jumped after being oversold last year. The falling dollar has boosted the price of basic materials significantly, as a falling dollar makes them attractive to investors in currencies other than the dollar. Vedanta (up 368pc), Centamin Egypt (up 191pc), Petropavlovsk (up 67pc) and Randgold Resources (up 38pc) have been notable success. A buy stance remains on Russian gold miner Petropavlovsk and Egyptian gold miner Centamin. However, Questor did tip South African ferrochrome producer International Ferro Metals at the wrong time and the shares have plunged by more than 50pc.

Investments in the oil sector have also proved good investments, including Tullow Oil, Afren, BP and Dana Petroleum. The oil services sector has proved even more lucrative, with shares in Petrofac up 116pc and Cape shares up 226pc. The stance on Petrofac shares is hold and Cape shares remain a buy.

It was not all a success, however. A bet on the direction of the oil price using an exchange-traded fund in the earlier part of 2009 proved disastrous – and led to a 30pc loss. All these shares except for Tullow remain a buy.

Next year prospects look brighter than they did 12 months ago, but there is still scope for substantial upset. Dubai World's bond default is a recent example of the potholes that could be faced by investors next year – and the chances of a double-dip recession are very real. Questor has said on a number of occasions that he would not start to become more positive on the outlook until global unemployment started to fall. There has been scant evidence of this so far.

One thing investors should bear in mind next year is that the FTSE 100 is not a reflection of the UK economy – and that's why it should do quite well. About 30pc of the index's weighing is comprised of commodity-related plays such as mining and oil and gas groups. These shares will be influenced by changes in global GDP and prospects for the dollar. The FTSE 250 is by far a clearer reflection of what is going on in UK industry. If the UK economy starts to get back onto its feet, it should be positive for this index.

One sector that should continue to perform is the outsourcing sector – no matter which party wins the election in the first half of the year. In his pre-Budget report, Alistair Darling said: "We will sell those assets that can be managed better by the private sector." As governments all over the world strain to cut debt, this trend will be global and will be around for many years to come.

Over the past year Questor has recommended a number of outsourcing groups and still has buy ratings on Serco, Capita and VT Group.

Questor will reveal his tips for 2010 in The Daily Telegraph on Monday, January 4.

http://www.telegraph.co.uk/finance/markets/questor/6890986/Dividends-are-the-key-to-a-sensible-investment-strategy.html