Two British Income Plays That’ll Make You Drool

The desire to replace market risk with predictable income grows each and every day in this country. In many cases, investors are replacing market risk with risky income. Today, we’re going to show you two income streams outside of U.S. market risk… and they both come with considerable profit potential…

Junk bonds have been out of control for the past several months. In just the first three quarters of this year, high-yield bond sales outpaced all of 2009 by 25%.

Since yields in the junk bond landscape are now at record lows, investors are now chasing equity yields with just as much fury. Take a look at IncrediMail Ltd (NASDAQ: MAIL), the income industry darling of the past two years. MAIL paid a grand total of $1.78 per share in dividends since July 2009. Meanwhile, its share price is sitting at just $6.49. Using this year’s numbers, that’s a 13.6% dividend yield — an unheard of number in today’s environment.

But that too had to come to an end. Just this month, MAIL’s board decided it was better for the company to conserve cash and put that money back into this growth play’s future. Meaning, no more dividends for its income-hungry shareholders.

That seems to be the story almost everywhere you look. But we pinpointed one area that it’s not the case…

When most investors think about dividends, they are talking about companies like Altria Group Inc (NYSE: MO) and Procter & Gamble (NYSE: PG). One typically pays 6-plus percent yields, and the other has been paying out shareholder distributions since 1891. But most are forgetting where some of the best dividends have come from over the last several decades: the U.K.

According to Barclays, GBP£100 invested in the U.K. stock market at the end of the Second World War would be worth GBP£5,721 today. But if you factor in reinvested dividends throughout that time period, that 100 quid would be GBP£92,460 today. And now may be the best time of all to get in on British dividends.

The Turnaround Story of 2010

Not only did the U.K. face a recession equal – or nearly equal – to its American brethren, it was dealing with a debt problem that seemed nearly impossible to combat. In the height of the recession, The Economist writes:

Britain’s public finances, however, are on some measures the worst of any rich country. It is likely to have a bigger deficit in 2010, as a percentage of GDP, than even the likes of Italy.

All seemed hopeless… that is, until election season. Unlike U.S. politics, the U.K. political calendar is relatively short. The month-long campaign produced the first coalition government since 1945. While it may sound like a bad idea bringing liberals and conservatives together to battle out an austerity plan to keep their government solvent during such a horrible economic environment, the outcome might surprise you.

Prime Minister David Cameron and his Deputy Prime Minister Nick Clegg have been able to adopt policy after policy that alienates people on both sides, yet not to the degree most expected. Their mild, yet powerful reforms have generally eased debt tensions for Britain… or at least business uncertainty in the old empire.

According to a Capita Registrars study this past month, U.K. businesses are making a full recovery… or at least their dividends are beginning to. As you can see in the graph below, the most recent quarter, which ended the past September, was the first period of positive dividend growth since the start of 2009. And these numbers even factor in the massive BP dividend cut suffered this year.

This trend is expected to continue. Most expect 2011 to blow 2010 away as far as income distributions are concerned.

All this worked out to create a remarkable investment opportunity for the near term. You see, when you combine British dividend policy with a more comfortable investment landscape, you get a few plays that seemed unreasonable just six months ago look great today.

That’s not to say that you should put your life savings into the British Pound. Sometimes, even bad, long-term pictures create short- and medium-term opportunities. For now, we can’t think of many better places than Britain for income.

Two Sets of British Dividends to Consider

Take a gander at Aviva Plc (NYSE: AV). Aviva is in the least-favored industry in the world: insurance and fund management. However, the company was able to return to profitability quickly after the 2008 crash. It is now estimating that it will have profitable growth in both life and general insurance sales throughout the rest of 2010 and all of 2011.

But what makes Aviva attractive to income investors is its 5.8% dividend. More importantly, the company continues to grow that payment each year. And seeing how this stock was only recently listed in the U.S., the opportunity is ripe for the risk taker.

Another U.K. payer that caught our eye was Rexam Plc (Pink Sheets: REXMY), which is listed on the prestigious tier of the Pink OTC Market’s quotation system, OTCQX International Premier. Rexam is a packaging giant. It makes everything from prescription bottles to soft drink cans. This, as you can imagine, is a big-money business. It’s been good enough to allow Rexam to pay a solid 3.6% yield over the past year. Going forward, we expect that number to grow.

[Editor’s Note: Because of Rexam’s size and its Pink Sheet listing, be careful entering and exiting this play. As always, use limit orders.]

Sincerely,
Jim Nelson
Penny Sleuth

November 18, 2010

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