Investors must seek out strong firms that grow dividends consistently

Investors have ridden a rollercoaster of intense worries about the eurozone debt crisis over the last six months. Amid this turmoil, they could be forgiven for a feeling of bewilderment. This feeling is widespread, reflected in low volumes across stock markets as investors choose to sit on their hands and wait for some resolution to the crisis. So what’s the answer, asks Thomas Moore.

Investors need to accept that there will be areas where they can’t have certainty – being a political situation, the eurozone crisis is one of those areas.

Instead, investors need to remain focused on areas where we do have conviction – and there are plenty of companies where investors can have conviction in strong profits and balance sheets, leading to attractive dividend payouts.

Today the FTSE 100 index is hovering at levels first seen in January 1998. However, as the FTSE 100 is a capital-only index (in other words, it does not incorporate dividend payouts), this gives a misleading picture. As the UK market’s annual dividend yield has averaged 3.5 per cent, the overall return to investors has been far better than the FTSE 100 index level would suggest – albeit with lots of ups and downs along the way.

Income is particularly important in the current era of slow growth and low interest rates. Investors will be rewarded if they can identify strong companies that will grow their dividends consistently against a tough economic backdrop. More than 80 per cent of FTSE 100 companies now yield more than ten-year gilts.

We are confident that 2012 will be another strong year for dividends – backed by strong balance sheets, growing corporate earnings and dividend cover of nearly three times.

When everyone’s focus is on political and macro uncertainty, it is easy to forget to look at the outlook for dividends. Skittish market conditions give canny investors the opportunity to build positions in high quality businesses where they can have conviction in the strength of profits and dividend growth.

l Thomas Moore is manager of the Standard Life Investments UK Equity Income Unconstrained fund.