The rise and rise of telecoms and technology stocks across global stock markets is creating extremes in terms of relative valuations. This continues a pattern of trading that has become established over the past 12 to 18 months but lately seems to have accelerated.
It is exemplified by poor performances from the mainstream indices such as the Dow Jones average and the FTSE 100 that are showing significant declines so far this year. In contrast the Nasdaq index continues to power ahead and the newly created Techmark index in the UK has doubled since its launch in November.
Commentators are now talking glibly of the limitless growth prospects of the new "economy stocks" whose chief characteristic is that they are alive to the opportunities presented by the Internet and rapidly developing telecommunications technologies. In contrast the "old economy" stocks are being cold-shouldered by analysts and investors alike. This is leading to more and more cash being switched into the high-flying high-tech sectors and this buying pressure has pushed many share prices into the stratosphere. The flip side of this coin is persistent weakness in the share prices of the more traditional sectors of banking and basic industry.
The dichotomy in relative valuations has become extreme and presents the private investor with a dilemma. Strong share price momentum favours a policy of investing in the high-flying shares, but if there is a market correction the prices of many of these shares could fall quickly to earth with a sharp bump. Meanwhile, investing in the old economy stocks does not seem to offer much by way of short-term performance prospects.
However, for the more cautious and patient investor an attractive feature of many of these shares is that they now offer highly attractive dividend yields.
The table lists a selection of Irish shares that now offer above-average dividend yields that are well above rates offered on normal deposit accounts. Where the underlying business is relatively sound investors can usually invest in the knowledge that dividends will grow steadily over time. In some cases a high dividend yield can signal that a company is in trouble. In these situations the high dividend yield will prove to be more apparent than real as weak companies are forced to cut their dividends over time.
However, avoiding investment in companies on "super high" yields should be sufficient safeguard. An example of such a company in the Irish market is Crean, which has been forced to cut its dividend time and time again. It still trades on a yield of 10 per cent but this clearly signals that investors continue to believe that the company will not be able to maintain the dividend in the long-term.
All of the companies listed in the table have strong balance sheets and long established businesses. Clearly, all of these companies are faced with many business challenges but it is highly likely that the majority have sufficient management depth to cope with changing market circumstances.
Some of these companies such as Bank of Ireland and Viridian have substantial market capitalisations and at current share prices would have to be viewed as relatively low-risk investments. Clearly, some of the smaller-capitalisation investments such as Barlo and IWP International involve greater risk. However, a policy of investing in a selection of higher-yielding shares could well prove rewarding over the long term.
