The FTSE 100 looks set to generate a record level of dividends this year, with analysts expecting the index’s constituents to pay out a combined £88.8 billion.

Most of the top stocks in London’s flagship index are large, well-established companies in sectors like healthcare, financials, oil and gas and consumer staples. Companies like these are in prime position to pay out healthy dividends to income-focused investors.

The amount that analysts forecast the FTSE 100 to pay out in dividends this year has risen over the past three months, from £88.0 billion in March, despite the impact of the conflict in Iran.

“As a result, consensus analysts’ estimates suggest that 2018’s all-time high FTSE 100 dividend payment of £85.2 billion will finally be exceeded in each of this year and next,” said Russ Mould, investment director at investment platform AJ Bell.

“As a result, consensus analysts’ estimates suggest that 2018’s all-time high FTSE 100 dividend payment of £85.2 billion will finally be exceeded in each of this year and next.”

“Share buybacks could yet supplement this total,” Mould continued. “The FTSE 100’s members have already declared cash returns worth £36 billion via this mechanism for 2026. Add that to the forecast dividend payments and the total cash return from the FTSE 100 is currently expected to be £124.8 billion in 2026, or 4.7% of the FTSE 100’s total £2.7 trillion stock market valuation.”

Mould pointed out that this aggregate dividend yield beats both inflation and the Bank of England’s base rate, and is only slightly lower than the yield on the benchmark 10-year gilt (which is around 4.8%).

Top dividend stocks in the FTSE 100

Ten companies collectively (10% of the index’s constituents) account for more than half the FTSE 100’s expected dividend payouts this year, with a combined expected dividend payout of £46.8 billion.

They are:

^{Source: Company accounts, Marketscreener, consensus analysts’ forecasts via AJ Bell. Ordinary dividends only. Data as of 12 June 2026.}

While the figures above show the total amount these companies are expected to pay in dividends this year, it is worth considering the dividend yield – which measures dividends as a percentage of market capitalisation and, therefore, shows what your income from a stock would be based on the price you pay for its shares.

Those ten companies offer the following dividend yields, as of 29 June:

^{Source: LSEG}

According to AJ Bell, the top 10 FTSE 100 stocks based on their forward dividend yields (expected dividends over the next year as a percentage of their share price) are:

^{Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Refinitiv data via AJ Bell. Based on ordinary dividends only. Data as of 12 June 2026.}

FTSE 100 dividend payouts should be resilient despite the disruption from the conflict in Iran and the resulting closure of the Strait of Hormuz.

“Forecasts for company profits and dividends [have not] suffered thanks to the war in the Middle East, despite lingering concerns over the risk of long-term supply disruption of not just oil, but liquefied natural gas, sulphur, and helium,” said Mould. “Company earnings reports have been strong as upside surprises have comfortably outnumbered profit warnings on both sides of the Atlantic.”

Income-focused investors who favour investment trusts can also look for dividend heroes – trusts with a track record of raising annual dividends consistently for at least 20 years.

Legal & General Group (LSE: LGEN) is one of the oldest companies in the UK. It's also one of the few remaining that formed part of the FTSE 100 at the time of its inception. The group is known among investors as a slow-and-steady beast that pays a consistent, relatively high dividend yield, but hardly does anything to get the pulse racing. That is starting to change as Legal & General transitions towards an asset-light, higher-margin, faster-growth business.

Legal & General's longevity is down to its business model: life insurance and long-term savings. It is one of the largest retirement, life-insurance, and annuity providers in the country, operating under strict rules to ensure management runs the business prudently with a long-term mindset.

This means the business is relatively boring compared with other blue chips – boring, but not unprofitable. Legal & General throws off cash and has established itself as one of the UK's top income stocks, with a yield consistently in the high single digits.

Usually, such a high dividend would be a warning sign. Yields significantly higher than the market average usually indicate that investors believe the payout is unsustainable. In this case, however, the high yield and low valuation are more a reflection of the market misunderstanding the business model.

Legal & General is a dominant leader in the bulk-purchase annuity market and the largest provider of term life insurance in the UK. Both of these products are financially complex, involving multi-decade liabilities and, as a result, are heavily regulated.

There are strict rules governing how much capital the company must hold to meet its liabilities. Even for the most sophisticated financial analysts, determining how much revenue a bulk-annuity purchase or a term life-insurance product will generate over ten or 20 years is not straightforward.

You only need look at the firm's peers to understand this isn't a problem affecting only Legal & General. Chesnara, Standard Life (formerly Phoenix) and Just Group are all cheap and offer high yields. The problem is so bad that private-equity group Brookfield recently offered a 75% premium to buy Just. Standard Life has also decided to rename the company to focus on its more visible pension products, moving away from the old Phoenix brand, which was known as a closed-book consolidator.

This isn't just a problem in the UK. In the US, Brighthouse Financial (originally spun off from MetLife in 2017 to focus on retail life insurance) was acquired last year for a 55% premium. Athene was acquired by private-equity giant Apollo in 2022 for a 20% premium. Athene-backed Athora is in the process of acquiring the UK's Pension Insurance Corporation for £5.7 billion.

Jackson Financial, formerly the US arm of London-listed Prudential, spun off in 2021, has been so neglected that management has been able to acquire 40% of the outstanding shares in the past five years from cash flow as well as distributing a handsome dividend.

Times are changing, and so is Legal & General

Legal & General is becoming increasingly less reliant on its bulk-annuity, pension-buyout and life-insurance businesses. Instead, its asset-management and retail arms are driving an increasing share of profit. With £1.2 trillion of assets under management, Legal & General is one of the UK's largest investment-management firms.

It manages the funds attached to the defined-contribution (DC) pension schemes it manages, funds for international clients and a growing portfolio of private assets. Its private-market assets grew from £57 billion to £75 billion last year, which helped the overall fee margin on assets under management rise from 8.8 basis points to 9.1.

The group's workplace defined-contribution pension platform will be a key driver of growth going forward. According to the Pensions Policy Institute, the aggregate value of private-sector workplace assets could grow from around £1.2 trillion in 2025 to around £2.2 trillion in 2045, or £4.4 trillion in a best-case scenario. There will also be significant consolidation among the major players. By 2035, the market is projected to comprise only 15 to 20 large DC “mega-funds”, down from more than 60 providers today.

Legal & General's workplace DC assets under administration rose 21% to £114 billion in 2025. Net flows totalled just £6.2 billion. But management believes workplace saving is now the group's “core customer acquisition engine” and the group expects £40 billion to £50 billion in net flows by 2028. The group's retail arm includes annuities, lifetime mortgage and retail insurance products.

Other revenue streams also suggest the business is firing on all cylinders. In the institutional retirement arm, the group has flagged a contractual service margin (CSM) of £12.4 billion, up 2% year on year. This is the unearned income the group is forecasting it will generate from its book of annuities – equivalent to roughly 214p per share, net of tax.

Management announced a £1.2 billion share buyback alongside the company's 2025 results – the largest in the group's history – on top of a 2% dividend hike. Total cash returns this year will come in at £2.4 billion, with management saying it expects £5 billion of shareholder returns from 2025 to 2027, 35% of the company's market value.

Based on these projections, shares are trading at a total shareholder yield of 16.7% for 2026 and a historical price-to-earnings (p/e) ratio of 11.9, although this does not account for long-term profit-generation potential, as highlighted by the group's forecast CSM. Legal & General is continuing its transition to a cash-generative, asset-light business. Investors should take note.

Rupert Hargreaves owns shares in Legal & General

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Investors who are among those who have taken money out of UK equity funds this year may be kicking themselves as FTSE 100 heads for another record 12 months.

Analysis by AJ Bell shows the FTSE 100 is on track for its seventh best year ever, with its highest return since the aftermath of the global financial crisis – up 22.8% year-to-date including dividends.

Despite a lack of major technology stocks in the index, the FTSE 100 is returning more than twice what it achieved last year and ahead of the 17.2% from the S&P 500 index which has been boosted by the performance of the Magnificent 7 in the US.

A much-anticipated Santa rally in the UK market could push returns up further.

It comes despite net outflows from UK equity funds remaining high for much of the year amid economic uncertainty.

Source: AJ Bell, LSEG. Total return. 2025 data to market close on 1 December.

Dan Coatsworth, head of markets at AJ Bell, comments: “There may therefore be a lot of people kicking themselves that they’d taken money out of the UK market. The year has been full of stories about sustained net outflows from UK funds, which is a surprise given the headline performance of the FTSE 100.

“This year’s success for the blue-chip index is not a flash in the pan. The FTSE 100 has delivered positive returns in eight of the past 10 years, averaging 9.1% annually over that period including dividends. This kind of performance reinforces the attraction of investing over the long term. There may be years when performance disappoints, but history suggests it’s worth pursuing.”

Here are the stocks that have performed best on the FTSE 100 in 2025.

Best and worst performing FTSE 100 stocks for 2025

Traditional sectors such as mining, metals, financials and defence have been the main drivers of the FTSE 100’s performance in 2025.

Metals producer Fresnillio has had a golden year, returning 364%, while mobile money service Airtel Africa has returned 179%.

Rolls-Royce has ranked among the top performers for the third year in a row, which Coatsworth said is helped by positive market sentiment towards anything linked to the defence sector.

Meanwhile, with a total return of 80%, Lloyds Bank’s share price is performing just as well as many technology stocks across the pond in the US.

Source: AJ Bell, ShareScope. Data to market close on 1 December 2025. Total return including dividends.

There have been some pretty poor performers this year though, which may be deterring investors from the wider market.

Media group WPP has seen its total share price return fall 60% year-to-date, while distributor and outsourcing brand Bunzl is down 31%.

Drinks brand Diageo appears to have been hit by Trump tariffs as well as changing consumer tastes, pushing its share price down 28%.

Even while UK shares have done well, it’s somewhat ironic that the country’s leading stock exchange operator the London Stock Exchange Group is one of the worst FTSE 100 performers – down 21%.

Source: AJ Bell, ShareScope. Data to market close on 1 December 2025. Total return including dividends.

Coatsworth attributed this to struggles to get companies to list in London as well as competition from AI for data.

He added: “Three quarters of the FTSE 100 delivered a positive total return in 2025.

“Fifteen names returned more than 50% including retailer Next, miniature fantasy figures maker Games Workshop and copper miner Antofagasta. Nine out of the top 20 best performing stocks in the FTSE 100 were in the broader financials sector, covering banks, insurers and asset managers.

“The number of true howlers was small, led by media group WPP, distribution business Bunzl and drinks group Diageo. It was also a bad year for packaging group Mondi and car portal Auto Trader, among others.”

Past performance is not a reliable guide to the future. However, investors’ portfolios can benefit from UK shares that have consistently and substantially outperformed the stock market. One of the best ways of measuring consistent outperformance is to select several different time periods, over all of which a company’s shares should have outrun the market.

We will take one-year, six-year and 12-year periods and look for companies that have gained more than the FTSE 100 over all three time spans. Six and 12 years are chosen since five years would take us back to 2020, when stocks were slumping owing to Covid. It is more reliable to measure growth from 2019 to 2025.

Taking 16 April 2025 as our reference date (after stocks reacted to Donald Trump’s tariffs), the FTSE 100 had gained 5.8% over one year, 11.6% over six and 28.7% over 12 years. There are at least 12 British companies from several different sectors that have easily beaten the blue-chip index over all three periods. We will discuss these 12, examine the reasons they have done so well and gauge whether their outperformance will continue.

Two stocks leading the pack

Two companies from the 12 stand out as having exceptional outperformance. These are Games Workshop and 3i Group, both FTSE-100 firms. Games Workshop has gained 45% in a year, 248% over six years and 1,997% over 12 years. In 3i’s case, its shares have gained 48% over one year, 287% over six years and 1,161% over 12 years. Games Workshop’s gains are even better than those of Magnificent Seven US firms, such as Amazon, with -4%, 73% and 1,230% over one, six and 12 years, respectively and Alphabet (Google’s parent company) with -4%, 145% and 615%. The gains made by 3i beat Alphabet over all three periods and Amazon over all but 12 years.

Games Workshop’s best-known product is the Warhammer series of games. Hobbyists of all ages enjoy collecting, modelling, painting and tabletop-gaming with their miniatures. This hobby is global and supported by a wide range of books, audio books, electronic games and Warhammer TV. Games Workshop supplies its global hobbyists through its own stores or trade outlets, and by licensing its deep and extensive range of intellectual property. It has just concluded negotiations with Amazon for adapting the Warhammer 40,000 universe into films and TV series, together with associated merchandising rights.

3i Group is an investment company specialising in private equity and infrastructure. It invests in mid-market companies in Europe and North America. Its private-equity (PE) portfolio has over 50 companies, with about half that number in the infrastructure portfolio. Action is an example of 3i’s PE portfolio companies. Based in the Netherlands, it is the fastest-growing non-food discounter in Europe with 2,918 stores in 12 countries. Action reported sales growth of 10.3% for the year to December 2024 and paid a dividend of £215 million to 3i, leaving it with a cash balance of €814 million.

Defence stocks

Our 12 companies include three from the aerospace and defence sector: BAE Systems, Cohort and Rolls-Royce. All three have benefited from the realisation by major European countries that they can no longer regard the US as a reliable ally, given Donald Trump’s behaviour since taking office in January. European countries have realised that they need to increase their support for Ukraine and raise their defence budgets to over 3% of GDP – a figure that, among large countries, only Poland exceeds at present, with 4.2%.

It is raising this figure to 4.7% this year. The UK government has pledged to raise its defence budget from 2.3% to 2.5% of GDP by 2027 and to 3.5% after that. Other European countries are also making substantial increases. These changes have led to sharp increases in the share prices of European defence companies since early January this year.

Cohort is a group comprising seven innovative firms providing satellite, military and naval communications; advanced electronic and surveillance technology; data technology; and naval sonar systems. One of these seven is EM Solutions, an Australian developer and producer of high-end satellite-communications terminals for naval and defence customers. Australia is an increasingly important defence market, as highlighted by the recent AUKUS agreement. Cohort’s share price has risen 68% over one year, 237% over six years and 863% over 12.

BAE Systems designs and makes a broad range of defence equipment for global customers. Offerings include land, sea and air systems, with products such as combat vehicles, artillery systems, complex naval surface ships and fighter jets. The group also focuses on military electronics, intelligence and cybersecurity.

The company develops the future technologies on which new products are based and also offers a full spectrum of services from engineering to information management. One example of a future technology is the Tempest programme, which is a joint British, Italian and Japanese collaboration to develop and manufacture an advanced fighter jet independent of the US. It will incorporate a wide range of new technologies. BAE’s share price is up 32% over one year, 253% over six years and 364% over 12 years.

Rolls-Royce has three divisions. In defence, it is the market leader in military aircraft engines, naval propulsion and nuclear propulsion for submarines. When it comes to civil aerospace, it produces engines for large commercial aircraft, regional and business jets. Its power systems business includes power generation for data centres, manufacturing and utilities.

Rolls is developing small modular nuclear reactors (SMRs) to provide a low-cost, clean power source – each SMR being capable of powering a million homes for 60 years. Rolls has been selected as the supplier of sets of SMRs for the UK, the Czech Republic and the Netherlands, and is shortlisted for orders in Sweden. The share price is up 82% over one year, 131% over six years and 87% over 12 years.

Data providers

Our 12 companies include two major providers of data, RELX and London Stock Exchange Group (LSEG). RELX provides leading content and data sets with information-based analytics and decision tools to customers in 180 countries. For example, the legal profession is served by LexisNexis, which hosts over 161 billion documents and provides searches, analytics and AI capabilities. RELX is up 18.5% over one year, 123% over six years and 421% over 12 years.

LSEG comprises three major divisions. One is data and analytics, which includes trading and banking, enterprise data, and investment solutions, including indices. It makes up 63% of profits. Then there is the capital markets division, focusing on equities, foreign exchange, and fixed income. The post-trade arm covers derivatives, securities and reporting. LSEG’s shares are up 24.4% over one year, 127% over six years and 821% over 12 years.

Engineering stocks

Two engineering companies in our 12, Diploma and Halma, have grown steadily through both organic growth and successfully integrated acquisitions. Halma has a magnificent record of having raised its dividend at least 5% every year for 46 years.

Diploma has three main arms – controls, seals and life sciences – which all supply specialised products and services to sectors such as healthcare and environmental management. Offerings include industrial automation equipment, specialised cables, adhesives, fasteners and controls. The group made two acquisitions in each of 2023 and 2024. Diploma’s shares are up 8.5% over one year, 139% over six and 570% over 12 years.

Halma consists of 55 decentralised businesses operating in three segments: safety, environmental and analysis, and medical equipment. Halma buys small and medium-sized firms to secure the leading market share in a range of niche markets. It has acquired 55 companies, but also invests strongly in research and development (R&D) to ensure its products rate as the best available in their niches. Its shares are up 21% over one year, 48% over six and 433% over 12 years.

Specialised engineering and retail

Our specialised engineering businesses are Concurrent Technologies in electronics and Goodwin in mechanical and refractory engineering. Concurrent supplies the aerospace and defence, telecoms, transport, scientific and industrial sectors with high-end embedded computer products. Products are made to perform reliably in extreme conditions, such as shock, vibration and extreme temperatures/humidity. Concurrent’s shares are up 83% over one year, 99% over six years and 221% over 12 years.

Goodwin’s mechanical engineering consists of the manufacture of high technology castings, valves, antennae and pumps. Clients include the aerospace and defence, mining, oil and gas, water and power-generation industries. Goodwin Steel Castings makes specialised castings for frigates and submarines.

The refractory engineering arm makes refractory powders and processes them for the jewellery, aerospace and fire-protection industries. Four of five directors are members of the Goodwin family, and 56% of the shares are family-controlled. Goodwin’s shares are up 12.7% over one year, 129% over six and 230% over 12 years.

Next is a top-class retailer. Sales jumped 32% between 2021 and 2024. Next sells clothing, accessories, footwear and home products and operates through three main segments: Next online, Next retail and Next finance. I remember interviewing Simon Wolfson, Next’s CEO, along with other CEOs and chairmen for the UK government’s business department when I was a senior industrialist there. I was impressed by both his grasp of detail and his clear strategic thinking, and he has guided Next’s profitable growth. The shares are up 36% over one year, 108% over six years and 175% over 12 years.

How do our 12 stocks compare?

The share price growth of all 12 companies discussed above has vastly exceeded that of the FTSE 100. The FTSE grew 28.7% over 12 years, but eight of our 12 stocks grew more than 10 times as much (more than 287%). The FTSE grew 11.6% over six years, but 10 of our 12 rose over 10 times faster.

Given that the FTSE 100’s performance is modest, it is interesting to compare our 12 companies with America’s S&P 500, which has gained 4.4% over one year, 79% over six and 230% over 12 years. Over 12 years, eight of our firms beat the S&P and one equalled it. Over six years, 11 of our 12 beat the S&P and, over one year, all 12 beat the S&P 500.

Our 12 businesses are all profitable and all pay dividends. However, all invest in growth, so forward dividend yields are modest, ranging between 1% and 2%. The highest forward yield is from Games Workshop, with 2.72%.

Valuations and growth drivers

Games Workshop (LSE: GAW) is on a forward price/ earnings (p/e) ratio of 32. In the six months to 1 December, 2024 revenue rose 21% and operating profit 34%. The firm continues to grow briskly and there is still ample scope for it to exploit its intellectual property to expand its licensing income.

3i Group (LSE: III) has a forward p/e of nine. The 2024-2025 results to 31 March delivered an increased return on shareholders’ funds of 25%, while net debt was down to £771 million; gearing was 3%.

Cohort (LSE: CHRT) has a forward p/e of 25.8. The results for the half year to 31 October 2024 showed sales up 25% at £118.2 million, while the order book jumped 53% at £541 million. The May trading update reports strong revenue and profit growth.

Rolls-Royce (LSE: RR) has a forward p/e of 39. In 2024 sales grew 17% to £18.9 million and underlying operating profit rose 53%. Cash-flow growth of 88.7% enabled a £1 billion share-buyback programme for 2025. The 2025 outlook was upgraded. There are clear growth drivers for all three segments.

BAE Systems (LSE: BA) has a forward p/e of 25.8. The 2024 results show sales up 14% to £28.3 billion, underlying EBIT of £3 billion and an order book of £60.4 billion (over two years of sales).

RELX (LSE: REL) sells for 30 times forward profits. The 2024 results show sales up 14.7% to £18.9 billion, operating profit up 49.7% to £2.9 billion and net cash of £475 million.

London Stock Exchange Group (LSE: LSEG) has a forward p/e of 26 at a share price of 10,675p. The 2024 results show income up 6.1% to £8.5 billion, operating profit up 6.7% to £1.5 billion and free cash flow of £2.2 billion. The first products from the partnership with Microsoft are now reaching customers, with more planned through 2025.

Halma (LSE: HLMA) has a forward p/e of 31 at a share price of 3,206p. Halma completed seven acquisitions in the year to 31 March, has a healthy acquisition pipeline and a strong balance sheet to fund it. It delivered record 2024-2025 revenue up 11% at £2.25 billion, with EBIT up 12% at £411 million and the total dividend up 7% . This is Halma’s 22nd consecutive year of record profits. Net debt to EBITDA was reduced to 0.97 (down from 1.35 a year ago). Halma says it has made a strong start to its new financial year.

Diploma (LSE: DPLM) has a forward p/e of 27.8. The full year results to 30 September 2024 showed sales up 13.6% to £1.36 billion and operating profit up 11.3% to £207 million. The May interims showed sales up 14% with the operating margin climbing to 21.5%.

Goodwin (LSE: GDWN) has a trailing p/e of 29. Revenue for the year to 30 April 2024 was £191 million with operating profit of £26.9 million and net debt of £35.4 million. The March 2025 trading update reported that the order book had reached a record £300 million and that both the mechanical and refractory divisions are seeing strong growth, with debt cut by a further £10 million.

Concurrent (Aim: CNC) has a forward p/e of 29 at a share price of 193p. The results for 2024 show record sales up 27% at £40.3 million, pre-tax profit up 40% to £5.2 million and cash climbing 23% to £13.7 million. The company says that 2025 has started strongly in terms of both output and orders.

Next (LSE: NXT) has a forward p/e of 17. Revenue to 31 January 2025 was up 11.4% to £6.12 billion, with operating profit up 12.7% to £1.09 billion (exceeding £1 billion for the first time). Growth is driven through the Next brand, the Next online platform and product development. Next’s branded sales through its international websites have grown 350% over the last ten years and sales through third-party platforms now account for 30% of global sales.

Selecting your stocks

Given these 12 firms’ excellent growth records, it is no wonder seven of the 12 have forward p/es between 25 and 30, three over 30, one between 15 and 20, and just one, 3i Group, below 10 (9). A diversified group of five or six stocks for investment might include Games Workshop, one of the three defence companies, one of the two data companies, one or two of the four engineering companies and either Next or 3i.

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UK pharmaceuticals are delivering positive results despite potential headwinds. The sector could be worth a look.

Pharmaceutical companies account for some of the top stocks in the FTSE 100, the UK’s flagship index. Astrazeneca (LON:AZN), for example, is the largest stock in the index by market capitalisation at time of writing, ahead of banking giant HSBC and oil major Shell.

There are lots of headwinds driving the space at present. Weight loss drugs offer a potentially huge market for companies like Astrazeneca.

But there are also headwinds. In particular, Trump’s tariff regime could pose a major challenge for these globally diversified companies. Trump has recently threatened a 200% tariff on US imports of pharmaceuticals.

How are the FTSE 100’s biggest pharmaceutical stocks holding up against these pressures? And is now the right time to buy FTSE 100 pharmaceutical stocks?

Astrazeneca

Astrazeneca’s stock has gained 9.6% so far this year, as of 30 July.

On 29 July, Astrazeneca posted a first half revenue increase of 11% to $28 billion, versus the $27.7 billion analysts had expected.

Core earnings per share (EPS) rose 17% to $4.66.

“Meanwhile, the pipeline progress adds confidence that the 2030 revenue target of $80bn is one to meet or beat,” said Derren Nathan, head of equity research at Hargreaves Lansdown.

“Astra’s keeping up a frenetic pace of innovation and commercialisation with 12 positive late stage read outs from clinical trials and 19 approvals in major territories.”

However, Nathan noted disappointment that Astrazeneca did not upgrade its forecast for the year given the strong financials.

He also noted that tariffs are weighing on Astrazeneca’s share price. “These concerns look to have been overplayed with the threat of enormous import levies subsiding for now, and Astra’s $50 billion pledge for US investment likely to leave it in the Trump administration’s good books,” he said.

Astrazeneca’s share price gained 3.4% on 29 July, following the results.

GSK

Shares in GSK (LON:GSK) are up 7.8% so far this year, and the stock gained a boost on 30 July when it posted a strong set of second quarter results.

EPS rose 15% to 46.5p, beating analyst expectations of 41.9p, with revenue increasing 6% to £8 billion. Analysts had forecast revenue slightly below this, at £7.8 billion.

Sales of speciality medicines rose 15%. Within this, the key HIV franchise and oncology (cancer) division grew by 12% and 42% respectively.

“The prognosis for GSK is looking positive,” said Nathan. “It hasn’t let itself get too distracted by tariff uncertainty, with both second-quarter sales and earnings coming in ahead of market forecasts.”

Nathan also noted that current guidance includes the tariffs that have so far been imposed.

GSK stock had gained 3.9% as of 3.45pm following the results.

Haleon

Haleon’s (LON:HLN) stock has fallen 4.8% in the year to date, trailing its larger FTSE 100 companions Astrazeneca and GSK.

Q2 revenue came in at £2.63 billion, below the £2.68 billion analysts had forecast and representing 3.0% in organic revenue growth. That translated into 9.2p per share in adjusted earnings for the first half of 2025.

Haleon’s stock opened 3.1% lower on 31 July following the results.

FTSE 100 pharmaceutical stocks compared

Here’s how these three pharmaceutical stocks are currently priced compared to their past and expected earnings. All data is as of market close on 30 July (before Haleon’s results).

Source: Yahoo Finance

Investors who have stuck with top UK shares and funds may finally be rewarded.

The FTSE 100 hit record highs this month after breaking through the 9,000 barrier and there are plenty of shares and funds that are benefiting from its resurgence.

It comes as the UK stock market has lagged other countries in recent years, with the S&P 500, Nasdaq and Dow Jones dominating in the US amid the rise of the Magnificent 7.

But new political and economic uncertainty now seems to be driving interest in more established brands, many of which are listed in the UK.

Year-to-date, investors would have already made a 14.3% total return including dividends from a FTSE 100 tracker fund, excluding charges.

That is better than the S&P 500’s return of 9.2% over the same period.

Dan Coatsworth, investment analyst at AJ Bell, said: “It’s been a wonderful time to invest in UK shares. The FTSE 100 recently went through the 9,000 level for the first time and has hit a new record high on multiple occasions this year.”

What is driving the UK stock market?

Concerns about rising taxes and high inflation in the UK may make it hard to believe that the financial markets are actually doing well.

But the country’s relative political stability is looking attractive especially with concerns across the pond with US president Donald Trump’s trade tariffs and wider geopolitical tensions.

The FTSE 100 is full of the type of stocks that appeal to investors when there is uncertainty in the world, adds Coatsworth.

He said: “Investors seek companies with defensive qualities and the UK market has them in spades.

“Industries including tobacco, utilities and telecoms typically have steady earnings. They provide services which consumers and businesses need, and certain companies fall under the category of non-discretionary spending. We all have to pay energy and phone bills every month.

“The UK stock market has a wealth of defence contractors which have attracted investor interest against a backdrop of increased government spending on areas like cybersecurity and military forces.”

Valuation is another reason that UK stocks are attracting investors, especially out of US markets.

Coatsworth added: “American shares are expensive when you look at popular valuation metrics. For example, the S&P 500 index trades on 22.2 times next 12 months’ earnings. Between 2014 and 2020, the index was on a much lower multiple, trading between 14 and 18 times earnings.

“In contrast, the FTSE 100 trades on a mere 12.6 times forward earnings. The UK market has been subject to widespread takeovers in recent years, and this trend remains intact in 2025 as the valuation anomaly continues to attract bidders.”

The best FTSE 100 stocks

Mining and defence stocks are among the best performers so far this year.

Mexican precious metals mining company Fresnillo is up 139%, while defence firm Babcock is up 110%.

Coatsworth added: “Gold is often popular with investors during periods of uncertainty such as heightened geopolitical tensions. The price hit a new record higher earlier this year and that has created a tailwind for precious metal miners, including Fresnillo whose shares have more than doubled in value since January.”

He said banks and insurers are also popular due to their stable dividend payments.

The best FTSE 100 funds

Buying the top performing shares individually can be pricey but there are some funds that have managed to outperform the market so far this year.

The top performing UK fund year-to-date is SVS Zeus Dynamic Opportunities, up 24.4%, which invests across all company sizes listed on the UK stock market.

It has a concentrated portfolio that includes stakes in defence and engineering groups Rolls-Royce and Chemring, airline EasyJet, and supermarket chain Tesco. Its outperformance can be attributed to clever stock picking.

Better known is Ninety One UK Special Situations which positions itself as a ‘best ideas’ UK portfolio with a value tilt. It is up 20%

Rolls-Royce is once again present, while it also invests in airline Jet2 and cigarette maker British American Tobacco.

Coatsworth said: “While nearly half of the companies in the FTSE 100 have beaten the overall index year-to-date, not everyone likes to buy individual stocks and shares. Those investing in funds were still able to outperform the market if they picked the right instruments.”

The FTSE 100, the index comprising the 100 largest UK-listed companies, has hit new highs during the opening days of 2026, continuing its momentum from a strong year in 2025.

The FTSE 100 returned over 21% in 2025, its best year since 2009.

Now the index looks to have continued its momentum from last year, and has broken through the 10,000 point threshold. The FTSE 100 set its latest all-time high on 6 January when it briefly reached 10,158. On 13 January, it returned to close to these levels.

“The Footsie has been on the front foot again reaching fresh records of 10,150” early in the year, said Susannah Streeter, chief investment strategist at Wealth Club. Investors, she said, are “seeking solace in the defensive nature of listed multinationals”.

Many experts picked out UK stocks as a promising investment when considering where to invest for 2026.

All British investors, from experienced stock market experts to beginners, will keep a close eye on the index and its constituents are frequently numbered among the most popular stocks for DIY investors.

Why is the FTSE 100 at record highs?

The FTSE 100 has benefitted from geopolitical turmoil early in the new year.

“Equity markets are continuing to thrive in 2026 in the face of mounting geopolitical tension,” said Derren Nathan, head of equity research at Hargreaves Lansdown.

Some of the FTSE 100’s top stocks have been beneficiaries of that tension. European defence stocks rose following the US intervention in Venezuela, with Rolls-Royce (LON:RR.), BAE Systems (LON:BA.) and Babcock (LON:BAB) among the beneficiaries.

Positive updates from some of the index’s key constituents have also buoyed the FTSE 100 towards new highs.

These include Whitbread (LON:WTB), owner of Premier Inn, which announced improving Q3 demand as well as a less-than-feared impact from UK business rates on the morning of 13 January, and beverage giant Diageo (LON:DGE) whose plans to streamline its business by offloading some of its Chinese operations raised investors’ spirits.

Given the tariff-driven turbulence that rocked the US economy last year, many investors rotated out of US stocks. The FTSE 100 was one of the indices that benefitted, as (despite its recent gains) UK stocks are relatively undervalued.

“Perhaps momentum, US equities and tech are no longer the only game in town,” said Russ Mould, investment director at AJ Bell. “Further all-time highs could stoke further confidence and fresh interest in the still much-maligned UK equity market.”

How to invest in the FTSE 100

The FTSE 100 is worth considering for UK investors. While it is formed of the largest UK-listed companies, most of these are big and globalised – so it gives exposure to much of the global economy whilst generally sticking to companies that will be known and familiar to you.

Beginner investors looking for fund ideas could consider a tracker fund that follows the FTSE 100.

These include the Vanguard FTSE 100 UCITS ETF (LON:VUKG) or the HSBC FTSE 100 Index Fund.

Some investors prefer to use investment trusts. Active strategies aren’t necessarily the best way to invest in an index as they will incur higher fees and fund managers will, typically, have a specific strategy that aims to outperform the index, so holdings and returns won’t match the FTSE 100 in the same way that a tracker fund would.

But two investment trusts that hold large-cap UK stocks are CT UK High Income Trust (LON:CHI) and City of London Investment Trust (LON:CTY), both of which have around 77% of assets invested in FTSE 100 companies as of their latest updates.

When chancellor Rachel Reeves was seen with tears in her eyes in the House of Commons recently, it was probably because she had been contemplating the prospects for the economy over the next few months. She promised she would generate “growth, growth, growth”, but so far, there has been very little sign of it. Her Budget last autumn stopped the economy in its tracks. The non-doms fled. Companies put a freeze on hiring. It has been a dismal start to her time in office, and it’s not now clear how long she can survive.

Yet she can claim one achievement. The FTSE 100 hit an all-time high this week, briefly nudging through 9,000. It fell back soon afterwards, but it is still up significantly on the year so far. It could even punch through the psychologically significant 10,000 barrier later in the year. It may not be long before we see Reeves brandishing a chart of the index to show how well she is doing and claiming that global investors are backing her policies.

The FTSE 100 is still lagging far behind

Still, the reality is that there is nothing to celebrate. The FTSE is only just starting to catch up with markets around the world after years of dismal underperformance. The index hit 6,930 all the way back in December 1999, meaning it has taken 25 years to add just another 2,000 points. For a comparison, Germany’s Dax index has tripled over the last 25 years. In the US, the S&P 500 has risen fourfold over the same time period; the tech-heavy Nasdaq more than six-fold. True, the CAC-40 in Paris has done almost as badly, but otherwise every other major index around the world has soared past the FTSE 100. Indeed, simply to have kept pace with its peers the index should be somewhere between 20,000 and 30,000 by now. In that context, 9,000 does not look like anything to get very excited about. The returns have still been miserable compared with what you might earn elsewhere.

What success it has had won’t last. The FTSE 100 is a very international index, with companies from Shell to GSK to Diageo earning most of their profits from the rest of the world. But it is still basically tied to the British economy. And the outlook for growth in this country is grim, and getting worse all the time. Foreign investment has collapsed, retail sales are flat and very few new jobs are being created.

Worse, with the government desperate for extra money to spend, taxes are inevitably going to rise, and businesses will bear the brunt of that, just as they did last time around. We may well see higher business rates for big shops and warehouses, an extension of windfall taxes on the energy companies and the banks, and we may even see a “temporary” corporation tax surcharge, modelled on the levy that was charged in France last year. Whatever form it takes, it will mean lower profits and lower dividends to distribute to shareholders, and that will stop the index from climbing much higher.

The FTSE 100 – a dull backwater

Finally, companies are still leaving, with a wave of major businesses choosing to list their shares in New York instead of London. The likes of Flutter and Wise have already gone; even the largest company quoted on the FTSE, the pharmaceutical giant AstraZeneca, has discussed a move to the other side of the Atlantic. Meanwhile, fast-expanding new businesses, such as the fintech star Starling Bank, are looking towards Wall Street instead of the City, and global companies, such as the Chinese fast-fashion powerhouse Shein, are turning down the opportunity to list here. For an index to grow at a decent rate, it needs a steady stream of faster-growing new companies to join it, and to replace the older, more mature giants that don’t have much potential for expansion. The FTSE 100 has entirely lost the ability to attract those kinds of businesses, and that is going to make it very hard to keep up with its peers, especially in the US.

The blunt truth is that the FTSE is turning into a backwater – and investors are still a lot better off putting their money to work elsewhere.

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The FTSE 100, the UK’s flagship stock market index, made a strong start to 2026 but has stuttered in recent months following the outbreak of the war in Iran.

The index’s constituents feature consistently among the top stocks for retail investors, with household names like Rolls-Royce (LON:RR.) and Legal & General (LON:LGEN) topping the list of shares bought by investment platform Interactive Investor’s customers during April.

The FTSE 100 hit all-time highs early this year, breaking the 10,000 barrier for the first time on 2 January and peaking at just below 10,935 on 27 February.

That date, not coincidentally, marked the last trading day before the outbreak of the war in Iran. Since then, the FTSE 100 has fallen 3.9% (as of market close on 27 May), with the conflict perceived as a headwind to both the UK economy and its flagship index.

Figures released on 25 May by the British Chambers of Commerce (BCC), a trade body representing British businesses, showed that 80% of UK firms it surveyed reported an existing or expected impact from the Iran conflict.

“Higher energy bills, shipping disruption and the rising cost of raw materials are daily concerns for business,” said William Bain, head of trade policy at the BCC.

“Even if the current ceasefire soon signals the end of the conflict, the economic reverberations will be felt for many months to come,” he added.

It should be noted, though, that the UK economy and the FTSE 100 are not the same thing. FTSE 100 stocks are typically large, multinational companies whose revenue is derived mostly from overseas. As such the index’s performance isn’t necessarily correlated with that of the UK economy.

In fact, some of the largest FTSE 100 stocks are oil and gas majors that have profited from rising oil prices since the war’s outbreak.

So what are the top stocks in the FTSE 100, and should you consider investing?

The top FTSE 100 stocks by market cap

In terms of market capitalisation (market cap), these are the biggest stocks in the FTSE 100 as of 28 May:

^{Source: London Stock Exchange}

At present, HSBC (LON:HSBA) is the largest stock in the FTSE 100, followed by pharmaceuticals giant AstraZeneca (LON:AZN).

The top-performing FTSE 100 stocks of 2025

Last year the FTSE 100 gained 21%, its best year since 2009 (the recovery following the global financial crisis), when it returned 22%.

Here are the top-performing FTSE 100 stocks of 2025:

^{Source: LSEG}

Fresnillo (LON:FRES), the world’s largest silver miner, led the FTSE 100 as its share price increased more than fivefold during the year, benefitting from a 147% increase in the price of silver. Endeavour Mining (LON:EDV) and Antofagasta (LON:ANTO) also cashed in on an excellent year for precious metals.

Defence stocks like Rolls-Royce and Babcock International (LON:BAB) also made the top 10 list, alongside resurgent financial stocks like Standard Chartered (LON:STAN), Prudential (LON:PRU) and Lloyds (LON:LLOY).

Should you invest in the FTSE 100?

While UK share price gains don’t always match the explosive rates of their American counterparts, FTSE 100 shares can be a good source of dividends and close the gap in terms of total returns.

“Fundamentally, the FTSE 100 can help provide ballast to an ISA or pension portfolio, particularly as the index has a rich source of dividends and a good mix of cyclical and defensive companies,” says Dan Coatsworth, investment analyst at AJ Bell.

“Holding UK equities alongside the US, emerging markets, Europe and others may be the best way to capture emerging winners, reduce your investment risk, and benefit from global megatrends,” says James McManus, chief investment officer at J.P. Morgan Personal Investing (formerly Nutmeg).

One easy way to invest in the FTSE 100 is buying a tracker fund such as the Vanguard FTSE 100 UCITS ETF (LON:VUKE).

Aviva and Direct Line Group have agreed a sweetened cash, shares and dividends deal that will see Aviva acquire its rival and capture more than a fifth of the combined UK motor insurance market.

FTSE 100 constituent Aviva (LON:AV) had previously attempted to acquire Direct Line Group (LON:DLG) for 250p in November, but Direct Line’s board dismissed this offer out of hand, describing it as “highly opportunistic”, according to the FT.

The latest offer, consisting of 129.7p in cash, 0.2867 Aviva shares and a 5p dividend for every Direct Line share, was accepted quickly though. The two companies issued a joint statement confirming the agreement in principle this morning (6 December).

“Aviva had no choice but to dig deeper if it wanted to secure Direct Line,” said Dan Coatsworth, investment analyst at AJ Bell. “Lo and behold, the offer has been raised to a much more realistic level to get the deal done.”

The deal is worth approximately 275p to Direct Line shareholders, based on Aviva’s share price before the start of the offer period, and therefore equates to a 73% premium compared to Direct Line’s share price at that time.

Direct Line shares opened 6 December at 252.2p, 6.86% above their close price the previous session, and jumped a further 2.22% to 257.8p later in the morning before falling back to around their opening price.

Why is Aviva buying Direct Line?

In effect, Aviva is taking advantage of a rival enduring a tough patch, and moving decisively to capitalise on it.

“Let’s not sugarcoat it: Direct Line has hit some serious potholes lately”, said Matt Britzman, senior equity analyst at Hargreaves Lansdown. “Market share has been sliding, underwriting hasn’t exactly been flawless, and regulators have been knocking on the door.”

Direct Line’s share price had fallen 9.9% in the year up until Aviva’s first bid on 27 November.

“For Aviva, the price is pushing the limit of good value but snapping up Direct Line could be a strategic jackpot,” says Britzman.

The deal will see the combined entity control more than 20% of the motor insurance market, as well as offering Aviva the opportunity to guide Direct Line’s ongoing business transformation and realise efficiency gains from the new entity’s scale.

“Aviva has performed every step of the takeover dance flawlessly,” says Coatsworth. “It’s spotted a rival going through a weak phase and thrown its hat into the ring as an interested buyer.”

Should you buy Direct Line shares?

Direct Line shares are currently trading at approximately 252p, notably below the implied value of Aviva’s offer. So, is there an easy payday in store for anyone who buys Direct Line shares now?

Not necessarily. The first point to remember is that both parties have only reached an agreement in principle. Nothing is confirmed whatsoever as yet; Aviva has until Christmas Day to confirm that it wants to make a firm offer in line with the agreement.

“There was speculation overnight that Aviva had quietly proposed 261p versus the 250p previous offer,” says Coatsworth. “If true, perhaps the indicative response to 261p was negative so Aviva might have raised the price to 275p and felt rushed into going public on the proposal without having all the paperwork finalised to make a formal bid.”

Direct Line Group shareholders will then vote on the deal. While this is also likely to go through, given that the board has indicated that it will recommend to shareholders that they accept the offer and the premium it implies on Direct Line’s prior valuation, it is another point of potential uncertainty.

Will the CMA block Aviva’s Direct Line takeover?

Besides the two companies following through on the deal, there are other factors that could scupper it. For example, given the substantial share of the motor insurance market the combined entity would control, it is possible that the Competition and Markets Authority (CMA) could block the takeover.

“The competition watchdog will almost certainly look at the deal as the enlarged group would account for a large chunk of the motor insurance sector,” Coatsworth told MoneyWeek.

Direct Line’s share price has already gained substantially since Aviva’s interest in a takeover became known, and as such, its shares are implicitly overvalued compared to its business performance at present, despite still trading below the 275p level the offer implies.

Should the deal fall through for any reason, Direct Line’s share price would likely fall back significantly, and investors who bought at current prices expecting a quick payout will be left carrying the bag.

“There is an arbitrage opportunity with Direct Line’s shares given they are trading below the new proposed offer from Aviva,” says Coatsworth. “But any investors considering jumping in now must understand the risks to the deal.”

Burberry has been dumped out of the FTSE 100 index of Britain's biggest listed companies after 15 years in the top flight. 

The historic British brand, which is known for its check print and trench coats, appears to have fallen out of fashion after its share price slumped by almost half over the past six months. It has been replaced by insurer Hiscox, which has seen its share price rise by a fifth over the past year.

The FTSE 100 index is reshuffled four times a year, enabling top-performing companies to enter, while laggards slip out into the lower tier FTSE 250.

FTSE Russell, the global index provider, said: “In the rebalance, Burberry Group will leave the FTSE 100 and enter the FTSE 250.

“The rules-driven, impartial quarterly reviews ensure the indexes continue to portray an accurate reflection of the market they represent.”

Burberry has felt the impact of a slowdown in the wider luxury sector, with demand from shoppers dented during the cost-of-living crisis. It ousted its chief executive Jonathan Akeroyd after just over two years in July and axed dividend payouts following a sales slump. Akeroyd was replaced as CEO by industry veteran Joshua Schulman, who was previously the boss of American fashion brands Michael Kors and Coach.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "Turning things around from here is a tough task for the new chief executive, Joshua Schulman.

"His experience at brands such as Michael Kors, Coach, and Jimmy Choo should help Burberry build back up its brand desirability, but this is likely going to take considerable investment and patience."

Raspberry Pi promoted to the FTSE 250 

At the same time the reshuffle has seen Raspberry Pi, the British microcomputer maker, enter the FTSE 250 only three months after listing.

The IPO was cited as a victory for the London market, which has suffered from a number of UK-listed firms being bought out or moving abroad.

Paddy Power-owner Flutter, for example, has shifted its main stock market listing to New York, while German-owned Tui signed off a plan to delist from London in February. 

Before Raspberry Pi’s IPO, London’s stock market has struggled to attract interest from high-growth technology firms, which have shown a preference to list in New York. Indeed, the London Stock Exchange lost out to the US last year when UK chip maker Arm Holdings chose Wall Street over London for its stock market return.

Eben Upton, chief executive of Raspberry Pi, said at the time: "The quality of the interactions during the marketing process has underlined our belief that London has the right calibre and sophistication of investor to support growing, ambitious technology businesses such as Raspberry Pi."

The FTSE 100 gained 2.2% during December 2025, delivering on the seasonal promise of a Santa rally.

The gains helped the index break through a new milestone on the first trading day of 2026.

The Santa rally left the FTSE 100 at 9,982 at the end of 2025. It took just hours of trading for the index to pass the 10,000 mark on the morning of 2 January 2026 for the first time in its history.

Rebecca Maclean, investment director at Aberdeen Investments, hailed the milestone as a strong start to the year for the UK’s flagship index.

“It follows a strong 2025, when the UK market delivered a 22% gain, led by its largest companies. An impressive return for a region many investors continue to overlook,” Maclean added.

UK chancellor Rachel Reeves called the index’s new milestone “a vote of confidence in Britain’s economy and a strong start to 2026”.

The S&P 500 didn’t participate in the Santa rally last year, closing December 2025 just 0.05% above where it ended November.

This echoes a year that saw diversification in the stock market, with the top stocks of the year reflecting a move away from US dominance.

“Last year saw global equity leadership broaden, with almost every major market outpacing the US, as investors diversified their exposure,” said Maclean.

What is the ‘Santa rally’?

The term ‘Santa rally’ refers to the tendency of stock markets to rise as the festive season kicks in and consumer spending rises. This also sees optimistic investors pile more into the top stocks and funds.

The FTSE 100 has returned 2.1% on average during December since 1984, making it the index’s best-performing month of the year. April and July are the only other months of the year with an average gain above 1% during that period.

“If you want to know why markets talk about the Santa Rally, that is why – because the numbers back it up,” said Russ Mould, investment director at AJ Bell.

How often do we see a Santa rally?

The data shows that stock markets do tend to rise during December. Analysis from Fidelity International shows that the FTSE 100 posted a positive return in December in 24 of the last 30 years, while the S&P 500 rose in 22 of the last 30 Decembers.

Why that happens is less clear. Jemma Slingo, pensions and investment specialist at Fidelity International, attributes the existence of Santa rallies to positive sentiment among investors at this time of year.

“Optimism tends to build as the year draws to a close and investors look ahead with a sense of renewal in the new year,” she said. “Festive optimism, Christmas bonuses and thinner trading volumes are often cited as contributing factors.”

Mould points out that in the past, investors looked forward to a ‘January effect’, wherein financial advisers would put their clients’ money to work in the new year and lift the stock market.

While this no longer happens, Mould thinks that the Santa rally effect may have originated with investors attempting to anticipate the January effect in advance.

While the Santa rally effect can make December a buoyant month for the stock market, Mould cautions that it often precedes a weaker year ahead.

“The FTSE 100 has served up 11 annual losses since 1984 and 10 of those came after a gain in the December of the previous year,” he said. “The only exception was 2015, whose 4.9% annual decline came after a 2.3% slide in December 2014.”

Some of the biggest historical Santa rallies have preceded sharp market downturns, such as the shock Federal Reserve rate hike in 1994 that followed a buoyant December 1993.

Last year (2024) was one of the rare cheerless Decembers for the FTSE 100, which fell 1.4% during the month. But the index’s gains this year underscores the point that a dismal Decembers doesn’t necessarily mean an unhappy new year.

In a separate article, we also take a look at where to invest for 2026.

Should you bank on a Santa rally?

Santa rallies are frequent occurrences, but like any seasonal investing trend, such as the ‘sell in May’ approach, they shouldn’t be relied upon too heavily.

“Seasonal patterns like the Santa rally are no substitute for a long-term investment plan, but they do offer an insight into how investor psychology can drive markets,” says Slingo. “Even in times of uncertainty – whether it’s financial crises, referendums or pandemics – December has often rewarded those who stayed invested rather than trying to time the market,” she added.

“History shows that investors who stay the course tend to be rewarded over time,” said Slingo. “The festive season can bring volatility and opportunity in equal measure, but discipline and perspective remain the best gifts investors can give themselves.”

The UK equity market is one of the most attractive markets in the world for income investors - and right now the market looks cheap. Investment trusts are a great way to capitalise on the market’s income credentials while outsourcing portfolio management to an expert. 

MoneyWeek deputy digital editor Rupert Hargreaves talks to Simon Gergel, portfolio manager at the UK-focused Merchants Trust, with 95% of assets invested in UK equities and the remainder in Europe. 

Last year the trust was one of the few to beat the market, with the value of its assets rising 10.5% for the 12 months to the end of November, compared to a return of 6.5% for its benchmark, the FTSE All Share Index. Over the six months to the end of April, the trust’s net asset value has increased by 14.1% compared to 12.5% for its benchmark. 

Today the trust trades at a slight premium to NAV and yields just under 5%.

MoneyWeek videos are designed to help our viewers become better investors. They're aimed at beginners and more experienced investors. 

In some videos, we explain investment concepts in an easy-to-understand way. In others, we focus on topical investment stories and themes. Either way, the emphasis is on clarity and brevity. 

We don't want to waste your time with a 20-minute video that could easily be so much shorter. 

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The share prices of FTSE 100 retailers Tesco and Sainsbury’s have surged higher over recent months.

Indeed, they have gained 13% and 16%, respectively, since the start of the year. This is significantly higher than the wider index’s return of 5% over the same period.

Of course, with a cost-of-living crisis in full swing amid rapidly rising interest rates, their near-term outlook remains relatively uncertain.

However, their low valuations and sound strategies suggest they offer attractive long-term investment prospects.

The potential impact of a cost-of-living crisis on FTSE 100 retailers

With annual inflation currently standing at over 10% and average earnings in the UK rising by around 6% per year, consumers’ disposable incomes are coming under sustained pressure.

In tandem, rapid interest rate rises that are being implemented by the Bank of England in an attempt to reduce inflation are contributing to a worsening near-term economic outlook. Indeed, the UK economy only narrowly avoided a recession in the second half of last year.

As a result, consumer confidence has reached record lows over recent months. This is likely to negatively impact the prospects for FTSE 100 retailers such as Sainsbury’s and Tesco as consumers become increasingly price-conscious.

While previously they may have valued quality and service alongside competitive prices when purchasing groceries, clothing and other items, they may now focus to a greater extent, or even solely, on price when deciding where to shop and what to buy.

This could lead to reduced sales and, in particular, squeezed margins across the retail sector as consumers become more willing to trade down to cheaper substitutes, postpone spending on certain items, or even avoid specific products that they now deem to be unnecessary.

From an investment perspective, falling sales or reduced profitability is unlikely to be conducive to a rising share price for either Tesco or Sainsbury’s.

Why Tesco’s share price offers good value for money

Despite Tesco’s recent share price rise, the FTSE 100 retailer continues to trade on a low valuation.

It has a price-to-earnings ratio (p/e) of just 11.8 and a price-to-sales ratio (p/s) of only 0.3. This suggests that investors have fully priced in a tough near-term outlook for the firm as it contends with weak consumer confidence amid a cost-of-living crisis.

Moreover, the company is in a strong position relative to other retailers to overcome, and even capitalise on, current downbeat sector trends.

Notably, it has relatively high levels of customer loyalty which could mean it is less affected than sector peers by an increasingly price-conscious consumer. Over 20 million households in the UK have a Tesco Clubcard which may mean they are relatively sticky, and less likely to shop at a cheaper rival such as Aldi or Lidl.

In addition, Tesco is on track to deliver £500m in cost savings in the current financial year. By the end of next year, it expects to generate around £1bn in cumulative savings as part of a major efficiency programme. This will help it to maintain current margins at a time when high inflation is causing many FTSE 100 retailers to report rising costs and squeezed profitability.

The company’s dominant online position does not appear to be fully reflected in its current share price. It has a 36% share of the online grocery market which is likely to catalyse its financial and investment performance as a rising proportion of UK consumers pivot to online channels when purchasing their groceries and other products.

Why Sainsbury’s share price can deliver FTSE 100-beating performance

While the near-term outlook for Sainsbury’s share price is likely to remain precarious given the challenges facing consumers, it nevertheless has the potential to outperform the FTSE 100 over the long run.

Crucially, it continues to offer a wide margin of safety even after its recent share price rise. The retailer currently trades on a p/s ratio of just 0.2 and has a p/e ratio of around 10.2. Both figures indicate that its shares remain undervalued even though the company faces an uncertain near-term outlook due to weak consumer sentiment.

Sainsbury’s is still in the midst of a major reorganisation as it seeks to successfully integrate different parts of its business, such as Argos and Habitat, into its supply chain.

It now expects to generate over £1.3bn in cost savings in the three years to 2024, with around £730m of savings having already been delivered. Reducing operating costs at the same time as many other FTSE 100 retailers are experiencing rising costs due to high inflation could provide Sainsbury’s with a clear competitive advantage.

Indeed, it is allowing the firm to reinvest £500m in pricing over a two-year period that should allow it to expand market share, as it did in the most recent quarter, while rivals without such financial flexibility struggle to keep prices low.

A growing market share could allow Sainsbury’s to capitalise to a greater extent on an eventual UK economic and consumer recovery, thereby catalysing its long-term share price performance.

Are these FTSE 100 retailers worth buying?

The scale of recent share price gains posted by Sainsbury’s and Tesco are unlikely to be repeated over the short run.

While both companies are well placed to overcome the cost-of-living crisis and weak economic outlook, investor sentiment is likely to remain downbeat regarding the sector's prospects over the coming months.

However, their ambitious cost savings programmes could provide clear competitive advantages and market share gains that translate into higher sales and profitability. Meanwhile, both stocks trade on low valuations that provide scope for significant upside over the coming years.

Therefore, while both stocks are likely to experience elevated levels of volatility in the short run as the cost-of-living crisis and an uncertain economic outlook play out, now appears to be an opportune moment to purchase them while they offer excellent value for money.

The FTSE 100 closed at another record high today at just over 8,010.

While other stock markets around the world have been struggling recently, the FTSE 100 has been charging ahead due to its heavy weighting towards resource stocks.

The weak pound has also helped boost sentiment towards the index. More than two-thirds of the index’s profits are earned outside the UK, meaning their earnings are worth more when translated back into sterling after the currency’s recent weakness.

According to Jason Hollands, managing director of Bestinvest, the record is due a combination of "today’s better-than-expected inflation figures aided by a weakening of the pound versus the dollar, as the highly international companies in the FTSE 100 have significant dollar earnings exposure so the currency conversion effect benefits them. In fact, FTSE 100 stocks earn more of their revenues in the US, than they do in the UK."

BP helps the FTSE 100 hit a record

A strong performance from oil and gas companies, as well as mining stocks, has helped drive the index higher over the past few weeks.

Last week, BP announced a record profit, following Shell, which also announced record profits the week before.

Another strong performer has been the global mining and commodity trading powerhouse Glencore. Shares in this business have returned nearly 20% over the past year.

And on the day the FTSE 100 hit a new record, the mining giant and commodity trader unveiled a record $34bn in profits for 2022.

More than half of those earnings came from its coal-mining business. EBITDA at Glencore's coal arm more than tippled year-on-year.

By far and away the best-performing stock over the past year is the defence contractor BAE Systems. Excluding dividends, investors the stock has returned 44% over the past 12 months. Including dividends, the stock has returned around 50%.

“The FTSE 100 has long been criticised for its lack of technology giants. However, in 2022 this proved to be a positive, allowing the UK index to avoid the ‘tech wreck’. Its favourable sectoral mix of energy giants and banks helped the FTSE 100 outperform in 2022,” says Scholar

Does this mean it’s time to buy the FTSE 100?

The FTSE 100 index is a global index, and, as such, is not necessarily an indicator of UK economic performance.

That could mean it’s a good investment for those seeking to broaden their international exposure at a time when the outlook for the UK economy isn’t too bright.

What's more, despite its recent high, the index still appears cheap.

“Despite the new high for the index, UK equities remain incredibly cheap with the FTSE 100 trading at a multiple of 10.7 times forecast earnings. This is low both compared to longer-term trend and it is also one of the widest discounts to the rest of the world in living memory. This is a good starting point, indicating the potential for further gains, while UK shares also provide an attractive level of dividend yield at circa 4.0%," says Hollands.

“In recent years, many investors have dismissed UK blue chip shares as ‘boring’, lacking exposure to exciting sectors like technology and social media. But in a more trying economic environment, solid companies churning out reliable dividends are well worth considering. Boring is the new sexy. With an abundance of exposure to energy, commodities, consumer staples and healthcare companies, the FTSE 100 looks well placed for the current environment.”

The long road to 8,000

It has taken the FTSE 100 index eight years to rise 1,000 points from 7,000 to 8,000, but “this is nothing compared to the time taken to climb from 6,000 to 7,000” notes Laith Khalaf, head of investment analysis at AJ Bell.

It took 17 years for the index to close this gap, a gain of 16.7%. In comparison, it took just seven months for the index to rise 20% from 5,000 to 6,000, which it hit in April 1998.

“It’s fair to say this period also skews the figures somewhat, but it’s also important to note that each subsequent 1,000 point advance marks a progressively less impressive price appreciation for the index,” says Khalaf.

“The first 1,000 point climb from 1,000 to 2,000 required a doubling in the price of the index. The move from 7,000 to 8,000 represents a jump in the FTSE 100 of just 14.3%, which translates into a compound capital return of just 1.7% a year for the last eight years. Not a slap in the face when you consider that doesn’t include dividends, but hardly a stellar performance either.”

However, including dividends, the index has produced a far better performance for investors.

The FTSE 100: the income index

The headline FTSE 100 figure doesn’t include dividends, which, considering the fact that dividends play such an important part of the UK market, is misleading.

“While this doesn’t affect the FTSE 100 too much over shorter time frames, over the longer term the gains made by the FTSE 100 significantly undershoots the return made by investors,” says Khalaf.

It has taken the FTSE 100 eight years to rise from 7,000 to 8,000, a return of 14.3%. Including dividends, the index has produced a total return of 50%. Over the past decade, the index has yielded a total return of 83.2%.

So, as Khalaf explains, “while the headline FTSE 100 index is a perfectly good measure of day-to-day market movements, investors shouldn’t be fooled into thinking it’s an accurate reflection of long-term returns from the stock market.”

UK small- and mid-cap stocks, like those in the FTSE 250, are a gold mine for income investors thanks to low valuations and high dividend yields.

The FTSE 250 index comprises the UK stock market’s 101st to 350th largest companies - also known as medium-sized or mid-cap companies. While they are not big enough to be part of the FTSE 100, they are still some of the UK’s largest publicly-traded enterprises and often feature as the top stocks to buy.

Richard Hunter, head of markets at investment platform interactive investor, says: “The FTSE 250 index is widely regarded as being something of a barometer for the UK economy, as opposed to the FTSE 100 where some 70% of earnings come from overseas.”

The FTSE 250 gained 6.6% in share price terms in the year to 3 December. But on a total return basis – which factors in dividends – this return rises to 10.4%.

“Yields on both the FTSE 250 and the FTSE SmallCap (excluding investment trusts) indices remain above the FTSE 100,” said Chris McVey, deputy head of quoted companies at Octopus Investments.

Income investors have a “once-in-a-cycle” opportunity to buy into UK small- and mid-cap stocks at depressed valuations, according to McVey in Octopus Investments’ latest dividend barometer.

“Investors should take advantage of this now as UK smaller-cap stocks can offer them a compelling opportunity in terms of both absolute and relative value, as well as income, benefitting from attractive and growing dividend streams,” said McVey.

Why are FTSE 250 stocks good value for income investors?

UK stocks trade at a discount, especially compared to US counterparts. The year so far has seen a partial narrowing of this divide in the FTSE 100, but the re-rating has yet to spread to UK small- and mid-cap stocks.

This relative undervaluation means that UK smaller companies offer greater dividend yields (which are calculated as a percentage of share price) compared to their larger counterparts.

“There is an exceptional opportunity at the moment in medium-sized UK higher yielding companies,” said Simon Gergel, manager of Merchants Trust (LON:MRCH). “The stock market is highly polarised and negative sentiment about the UK economy has created a great opportunity set for long-term investors.”

“We believe it’s an anomaly that these companies are continuing to fly under the radar for traditional income investors,” said McVey.

Three FTSE 250 dividend stocks

Ithaca Energy

Analysts led by Werner Riding from investment bank Peel Hunt rated Ithaca Energy (LON:ITH) a Buy and raised their price target to 260p from 200p following strong third-quarter results announced on 19 November.

“Ithaca has continued to build momentum year-to-date, supported by active NOrth Sea development and strategic partnerships,” wrote Riding.

As of 4 December, Ithaca offers an impressive annual dividend yield of 10.9%.

B&M

Considering the pessimism over the UK economy that abounded at the start of the year, some experts anticipated discount retailer B&M (LON:BME) to struggle.

That has proved to be the case, with the company enduring a stark selloff. Shares are down 55% this year, but Peel Hunt analysts are optimistic that new management can turn the company’s fortunes around.

“Arriving at B&M, new CEO Tjeerd Jegen faced a long to-do list,” said Peel Hunt analysts Jonathan Pritchard and John Stevenson in a research note. “Before, too much time was spent obsessing over store aesthetics and too little on understand what customers wanted [and] what worked for B&M.”

Providing that the return to retail basics is successful, Pritchard and Stevenson “see potential for a format that clearly works to return to its past glories”. They set a price target of 200p on 25 November, implying 22% gains from the latest close at the time.

Income investors will note that, trading at current depressed levels, B&M offers a dividend yield of 8.2%.

TBC Bank

Shares in TBC Bank Group (LON:TBCG) have gained 29% in the year to date. Despite these gains, it is still offering a dividend yield of 5.2%.

While forecasts for 2026 have been cut thanks to regulatory changes in Uzbekistan, where the Bank does most of its business, Peel Hunt analyst Start Duncan views this as “a delay rather than a fundamental change to the longer-term growth potential”.

Index funds, also known as tracker funds or passive funds, offer all sorts of benefits to investors.

While actively-managed funds can often incur high management fees for the supposed expertise of the fund manager, index funds are a low-cost alternative that offer investors convenient access to a sector or geography.

Some of the top funds that investors choose are, unsurprisingly, index funds – especially as passive funds often outperform their active counterparts.

“There is a high rate of underperformance for active investing strategies so there is a persuasive school of thought that investors should just aim to maximise returns by minimising costs with inexpensive index funds,” Rob Morgan, chief investment analyst at online investing platform Charles Stanley Direct, told MoneyWeek.

“They represent a particularly good strategy for areas where portfolio managers consistently struggle to beat the market index – often large, well-researched markets. The US market is a prime example, and investors will have done well in recent years simply to buy an S&P 500 tracker,” Morgan added.

Index funds can typically offer low costs (as well as low transaction fees due to low turnover).

Here, we’ll explore some of the tracker funds available to UK investors that carry the lowest ongoing fees, as potential low-cost additions to your portfolio.

What are index funds?

An index fund replicates the performance of a major index, like the FTSE 100 in the UK or the S&P 500 in the US.

“They do this by simply buying the same (or at least very similar) mix of investments as the index they track,” said Morgan.

“Rather than trying to beat the market, index funds simply aim to replicate it,” said Chris Beauchamp, chief market analyst at online investing platform IG. “They hold the same securities as the index they track, in the same proportions, so when the index rises, so does the fund, and vice versa.”

Low costs and more: what are the advantages of index funds?

The active versus passive investing debate is age-old. In theory, a skilled active manager will pick and choose stocks that will outperform the broader market benchmark (usually an index that a tracker fund will follow).

In reality, however, beating the market is difficult and the majority of active funds not only fail to do so but also significantly underperform. That, coupled with the fact the fees on active funds are almost always higher, means they can be an inadvisable way to invest in the stock market.

“Low costs are the headline advantage [of index funds], as annual charges are typically well below 0.5%, compared to 1%+ for actively managed funds,” said Beauchamp. “Over time, that difference compounds significantly.”

AJ Bell’s latest Manager versus Machine report, released in December 2025, showed that less than a quarter (24%) of active funds outperformed a passive alternative over the 10 years to 30 November 2025 – the lowest that metric has been since AJ Bell started running the report.

“There’s no dressing it up, it’s quite simply been a dreadful decade for active fund managers,” said Laith Khalaf, head of investment analysis at AJ Bell.

^{Source: AJ Bell and Morningstar, total return in GBP to 30 November 2025.}

Index funds aren’t just lower-cost alternatives to active funds, but they have also generated higher returns in recent years.

They are also “simple to understand, easy to buy, and inherently diversified, owning a slice of every company in an index rather than betting on individual stocks”, adds Beauchamp.

What are the disadvantages of index funds?

One of the obvious drawbacks of index funds is that, while they won’t underperform it, they won’t outperform the index they are tracking. Actively managed funds, by contrast, have the potential to beat their benchmark.

They also potentially expose investors to concentration risk, given that market cap-weighted indices become concentrated in the largest stocks.

“It is worth noting that the huge rise in the share prices of a cluster of large tech and e-commerce businesses has overwhelmingly driven the US market over the past decade,” said Morgan.

“Given the now-concentrated nature of these indices, should these stocks have a tougher time, a standard US or global index fund could struggle. You could say that investing in the US market passively has rarely been as concentrated, and therefore as risky, as it is today, and the more diverse approach of an active fund could help temper this.

12 low-cost tracker index funds to consider

Here, we’ve picked out a (non-exhaustive) selection of some low-cost index funds and exchange-traded funds (ETFs) that highlight the different kinds of exposure index funds can offer.

This information does not reflect all the fees and charges (as well as discounts) that might apply through different brokers.

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Beauchamp highlighted VWRL, calling this “a genuine one-stop-shop for diversification” given the broad exposure across developed and emerging markets it offers by tracking the FTSE All-World Index.

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The FTSE 100 is only a few percentage points up since its dotcom peak in December 1999, says James Yardley in the i newspaper. London is starting to resemble the similarly “hated” Japanese equity market, says Steven Andrew of fund manager M&G. “Places get this reputation from investors because they don’t make lots of money and they can be a bit dangerous if you own them at the wrong time.”

“For all the criticism aimed at the UK benchmark,” note that “the FTSE 100 has delivered an average annual total return of 7.75% since its inception in 1984,” says Investors’ Chronicle. True, that lags America’s S&P 500, but “it’s easily more than double the average UK inflation rate over the same period”.

What’s more, the London blue-chip index has been the best-performing major stock index so far this year (it has gone nowhere, while other global markets have plunged). “There is a certain irony in that the much-derided composition of the FTSE 100 is the main reason why it has held up reasonably well over the past six months or so.”

The FTSE 100’s weighting towards energy, mining and banking stocks have made it a refuge in the inflationary storm. By contrast, the FTSE 250, down almost 16% in 2022, has struggled owing to its greater weighting towards more cyclical industrial and consumer shares. The FTSE 100 bucks weakness in the UK economy because 80% of its earnings come from overseas. Analysts at Link Group think that sterling’s weakness should provide a £3.5bn-£4.5bn boost to total dividends this year; dollar earnings are inflated when translated into a weaker pound. A strong showing from miners helped push UK payouts to £37bn in the second quarter, the second highest figure on record. Link Group now expects headline payouts to climb by 2.4% in 2022 to £96.3bn.

“On a relative basis… British shares are incredibly well placed because we never had the bubble that America had,” Richard Buxton of the Jupiter UK Alpha fund told Danielle Levy in The Daily Telegraph. “We have some great companies… which are pretty cheaply valued. British shares offer a place to hide in difficult times in financial markets.”

Traders dislike Truss

The UK market could yet be heading for the odd bout of turbulence if Liz Truss is the next prime minister, however. “Truss’s policy platform… poses the greatest risk from an economic perspective… with an unseemly combination of pro-cyclical tax cuts and institutional disruption,” according to Ben Nabarro of Citigroup.

Truss is considering reviewing the Bank of England’s mandate to ensure it is tough enough on inflation, although she says this should not threaten its independence. The more predictable Rishi Sunak is the market’s favourite.

When the UK voted to leave the European Union in June 2016, it had one very obvious and dramatic effect – the drop in the value of sterling. Whatever your view on Brexit or its potential long-term disadvantages and advantages, the immediate impact on investors (sterling’s collapse) was pretty clear.

To some extent, UK investors were insulated from these economic challenges. Weaker sterling pushed up earnings for international companies and helped exporters. More than 70% of FTSE 100 profits are generated outside of the UK and over the past ten years this index has produced an average annual total return of 6.5%.

The FTSE 250 index has also performed particularly well, returning 8.3% over the past ten years on a total return basis. These figures suggest investors have seen real annual returns of 4.7% and 5% per annum respectively.

But even these figures pale in comparison to the rate of return UK investors would have been able to achieve investing in US stocks. An investment of £1,000 in a low-cost S&P 500 tracker fund would have grown at a compound annual rate of 15.6% over the past ten years thanks to a combination of the stronger US equity market performance and sterling’s devaluation.

Why am I bringing up this example right now? Because I believe it clearly illustrates why investors need to have some exposure to international markets, regardless of how comfortable they are with their home market. Too much exposure to a home region can bring unnecessary risks – the immediate effect of Brexit being an excellent illustrative example.

The outcome of the referendum was unknowable until the day after it happened. And once the results came through, investors had little or no time to re-position before the pound slid.

We had a similar event earlier this year. In the space of a few days the outlook for European economies deteriorated rapidly overnight when Russia invaded Ukraine. High oil and gas prices are sucking money away from energy importers to exporters (the UK is relatively self-sufficient in this respect with around half of its natural gas consumption coming from the North Sea), causing pain around the world. This only adds weight to the diversification argument.

It does not pay to have all of your eggs in one basket

The aim of international diversification is not necessarily to try and bet which country is going to succeed or fail over the next decade. Trying to predict these sorts of macroeconomic events is almost impossible.

One of the greatest advantages private investors have is the fact that we can invest anywhere in the world, in any opportunity where we believe there’s money to be made. And some countries do things much better than others.

While the UK might be a science and pharmaceutical superpower, America clearly has the edge when it comes to global technology giants. The US market is dominated by technology companies while one of the biggest sectors in the FTSE 100‘s resource stocks. There are also attractive opportunities in Europe in the pharmaceutical sector and luxury goods. Meanwhile, there are far more semiconductor manufacturers listed in Asia than there are in the West.

There is far more to international investing than just trying to pick which countries will succeed or fail over the next five or ten years. It’s really about picking the best companies in the world. If they are part of an economy that happens to outperform the rest of the world, then that’s an added bonus.

If I have to choose between picking the best tech company in the world listed in the US and the second-best in the UK, why would I pick the second best? It does not make any sense.

However, I would caution against international diversification for international diversification’s sake. For example, there’s really no sense in buying Brazilian stocks just because I have too much exposure to North American equities. The most important part is finding the right opportunities.

I personally wouldn’t invest in any South American markets because I’m not comfortable with the level of protection given to international investors, though you may differ. Instead, I focus on finding the best companies in markets I understand, mainly Europe, the UK and North America.

The barriers to entry are always getting lower

The barriers to international investing are no-longer as high as they once were either. Most online stockbrokers now offer international equity dealing for the same price as UK stocks and shares. A few are holding onto antiquated ways of charging over the odds for international deals, but with so much choice on offer, investors don’t need to use these brokers.

And if you’re not comfortable picking stocks in other markets and currencies, there’s always the option of buying an index tracker fund or investment trust with international exposure.

Aim (formerly the Alternative Investment Market) is London’s market for small and medium-sized growth companies. It has a bit of a bad reputation among investors and it’s easy to understand why. Aim has greater regulatory flexibility compared to the main market, which is supposed to make it easier for companies to list and attract investor capital.

Unfortunately, this light-touch regulatory regime has been abused by bad actors over the years. As a result, Aim has developed a reputation for being a financial Wild West.

But while it’s true that there have been some notable disasters in recent years, there have also been some great success stories. The manufacturer of concrete laying laser-guided equipment, Somero Enterprises, Inc. (LSE: SOM), is a great example. Investors who were savvy enough to put £100 in this company ten years ago have seen the value of their holdings hit £3,500 today.

FTSE 100 companies are expected to return a total of £78.5 billion in 2023, compared to £76.1 billion in 2022. Aim will never be able to rival the blue-chip index for income (the aggregate market capitalisation of the index is only around £80bn), but that doesn’t mean investors should ignore what the index has to offer.

With that in mind, here are the highest yields in the Aim All-Share index (excluding stocks with a market capitalisation of below £20m at the time of writing): 

Figures based on Refinitiv analyst estimates

The list contains a broad mix of companies from different sectors, growth prospects and valuations. 

Investor sentiment towards investment and financial services companies has deteriorated amid market volatility. As a result, many companies in the sector have seen their share prices slump and dividend yields. This is not just limited to Aim, it’s happening across the market, including blue-chip FTSE 100 companies.

This price action seems to reflect the view that these asset managers will struggle in volatile markets, and may continue to lose assets to passive fund providers. For those reasons, I’m a bit sceptical about their ability to hit dividend targets.

Real Estate Investors owns a portfolio of commercial properties and is structured as a real estate investment trust (REIT). Under REIT structure rules, the company has to return most of its property rental income to investors, which is the main reason why its yield is high.

Management is trying to close this gap by selling assets and paying down debt, and it has also hinted at special dividends to return additional capital. On that basis, I think Real Estate Investors’ dividend has strong foundations.

See also:

How to find the best stocks with dividends

Five dividend stocks to beat inflation

The ten highest dividend yields in the FTSE 100

The ten highest dividend yields in the FTSE 250

The ten investment trusts with the highest dividend yields

On the face of it, Imperial Brands (LSE: IMB) looks to be one of the most attractive income stocks in the FTSE 100 with a prospective dividend yield of 8% for 2022 and 8.1% for 2023.

Refinitiv analyst estimates also have the stock trading at a forward price/earnings (p/e) multiple of 6.9.

However, I wouldn’t take these figures at face value; in my opinion, Imperial’s stock looks cheap – but it is cheap for a reason.

Over the past ten years, Imperial has failed to create any substantial value for investors. The shares have returned 2.6% a year including dividends, compared to 6.2% for the FTSE All-Share Index.

What’s more, net income excluding extraordinary items has barely budged since 2014. Net income did jump in the financial year ending 30 September, 2021, although this was mainly down to a favourable financing charge. Excluding this positive development, adjusted group operating profit rose just 0.5% after stripping out the contribution from the now sold cigar division.

The dividend cut hurt sentiment towards the FTSE 100 company

While British American Tobacco (LSE: BATS), Philip Morris, Altria and Japan Tobacco International have become known the world over for their cash flow and dividend credentials, Imperial has struggled. In order to meet investor concerns about the overleveraged state of its balance sheet, it cut its dividend by a third in 2020.

This cut rebased the dividend to a more sustainable level. In the four years prior, dividend cover averaged just 0.6. To put it another way, Imperial Brands had been consistently paying out more than it could afford.

In my opinion, the decision to cut the dividend by a third was the right one. It had been bridging the gap between profits and dividends with borrowing, straining its balance sheet. A lower payout will not only help Imperial to cut borrowings, but will also help it deal with rising interest rates.

The decision to rebase the dividend is part of the new CEO’s growth plan.

In 2021 CEO Stefan Bomhard unveiled a five-year strategic plan to concentrate investments on the markets and regions where Imperial has the edge; the plan also acknowledges that it is a follower, rather than a leader in most markets, so it should focus on driving cash generation and returns for investors rather than trying to fight off bigger competitors with deeper pockets.

Unfortunately, while I believe the decision to cut the dividend was the right one, I think it decimated investor confidence. It could also explain why the market does not seem to have much confidence in its current dividend and valuation.

Still, Imperial’s management is pushing on with its transformation strategy and 18 months in, it is entering the “strengthening phase. ” In this phase it aims to develop and reinforce its position in its main markets, namely the US, UK, Australia, Spain and Germany.

In the six months to the end of March, Imperial increased its market share by 25 basis points in these primary markets, a notable development after an extended period of underperformance.

Nevertheless, there’s no denying the business faces a huge uphill struggle in the years ahead. As well as fighting off competitors, management is also going to have to deal with increasingly stringent tobacco regulations around the world.

Launching new so-called next-generation products, the category that includes e-cigarettes, heated tobacco and snuff products, is part of this strategy. During the six months to the end of March, adjusted operating losses from next-generation products improved by 50%.

Imperial Brands is making progress, but it has lots of work to do

When I am looking for dividend stocks to add to my portfolio, I tend to concentrate on businesses with robust balance sheets, a strong track record of creating value for investors and growth potential. If a company is not growing and paying more than it can afford to shareholders, sooner or later it will suffer the consequences.

To give Imperial its credit, it seems to have realised it was heading in the wrong direction. However, it’s going to take a lot to convince the market the business is back on the right track.

Then there is the fact that it faces much stronger competitors in its key markets, including Philip Morris and Altria, which own the rights to the Marlboro brand internationally and in the US respectively.

The company has acknowledged that it is a follower, not a leader, Which makes sense from a strategic planning point of view. However, as an investor, I’m not really looking to invest in corporations that are second best. Why would I? With thousands of companies to choose from around the world, I focus on finding market leaders.

That’s why I hold British-American in my portfolio, even though it is more expensive and has a lower dividend yield than Imperial. I’m planning to steer clear of Imperial until it can prove it’s on a sustainable growth trajectory.

Disclosure: Rupert Hargreaves owns shares in British American Tobacco.

At one point Scottish Mortgage (LSE: SMT) was the UK’s biggest investment trust by market capitalisation, championing a generation of disruptors from Amazon to Tesla. But if you look at the investor bulletin boards, it is now the subject of much scorn and vitriol.

The most recent trading update showed that net asset value (NAV) total returns for the year to 31 March were negative 13.1%, compared with a 12.8% gain for the FTSE All World index. The share price currently trades at 692p, a 55% decline from its 1,543p peak. It’s now on a wide 16% discount to NAV (the average discount over the past year is 1.3%).

The struggle isn’t over

The headwinds facing Scottish Mortgage are unlikely to abate soon. The fund bet big on technology; now, rising interest rates have triggered a sell-off in those growth stocks. There’s also the question of venture capital-style investments and what these are worth in today’s markets.

At first, Scottish Mortgage found itself somewhat insulated from the growth stock sell-off because a large part of its portfolio was in unlisted private investments; unquoted holdings represented 24.6% of the portfolio at 31 March, up from 20.2% a year ago. Initially, valuations for these companies weren’t hit as hard as the price of quoted stocks. That’s about to change: the current round of haircuts to valuations will be only the beginning of a long and painful process for many late-stage venture capital investments.

To be fair to Scottish Mortgage, there is a robust valuation system in place for these private companies. They are valued on a rolling three-month cycle (ie, roughly a third revalued every month), except for the half-year and full-year-end of the fund, or where there is a trigger event that indicates the fair value of the holding has changed, such as a funding round. I estimate we have at least another six months of cuts of anything between 10% and 30%.

Still, not all of Scottish Mortgage’s pain is external. Management has made some poor decisions, of which the big strategic mistake was a focus on Chinese internet platforms; one didn’t need a crystal ball to predict Tencent and Alibaba were in trouble with the Chinese government. That said, on pure valuation terms, firms such as Tencent are now some of the cheapest tech stocks on the planet (perhaps for a good reason).

So the rap sheet against Scottish Mortgage’s record is long and detailed; I can’t see the share price improving much this year. On paper this means I should sell my own holding, but I’m choosing to sit tight. The current portfolio is still unique – unlike many global equity funds, there’s diversification between both public and private assets, while maintaining a continuing focus on global businesses that can grow as technology disrupts more and more sectors.

Lower-risk alternatives

If you think the driving forces around technology and disruption are set to reverse, Scottish Mortgage is not for you. However, if you think otherwise, the situation calls for patience. I would argue that, as we face a more inflationary world, with more on-shoring of production and tighter supply chains, large-cap businesses with intellectual property assets and an ability to pass on extra costs to consumers will continue to thrive. In other words, the tech-enabled global brand platforms are precisely the businesses that might flourish in this new world.

Still, if you are yet to invest, perhaps you should wait for the discount to push out to 20%. Meanwhile, invest in a fund that actively benefits from market volatility, such as BH Macro (LSE: BHMU) or the Ruffer Investment Company (LSE: RICA), and move back into Scottish Mortgage once the mood shifts. If the fund’s focus on private, unlisted firms and its Chinese exposure still feels troubling, look at sister fund Edinburgh Worldwide (LSE: EWI), which has a more explicit mid- to small-cap tech and healthcare focus and is currently trading at a 13% discount to NAV.

The Weston family still owns 55% of Associated British Foods (LSE: ABF), the clothing-to-tea company they founded in 1935. This long-term focus has helped drive the business forward over the past eight and a half decades – a rarity among FTSE 100 organisations.

In some respects, ABF is two companies under one banner: there’s the retail side of the business, which owns the Primark brand; then there’s the food side of the business, which owns well-known brands such as Twinings Tea as well as food production facilities, including bakeries and British Sugar.

This diversification is both a benefit and a drawback. On the one hand, it gives the firm a foothold in many different markets, allowing it to capitalise on growth wherever it sees an opportunity. On the other hand, the market struggles to value the business. Is it a retailer, consumer goods company, agricultural giant or manufacturing enterprise?

Grouping the businesses together brings strength through diversification, but there's a reason other conglomerates have been forced to split up: it’s hard for the market to distinguish what’s what, which tends to lead to a lower valuation, commonly known as a “conglomerate discount”.

ABF’s valuation does seem to suggest it suffers from this – the stock is trading at a forward price/earnings ratio (p/e) of 12.7. That’s compared to a mid-teens multiple for the consumer goods sector as a whole and 18.8 for Primark’s closest competitor, H&M Hennes & Mauritz. This could be an opportunity for investors.

Associated British Foods offers strength through diversification

ABF’s diverse corporate structure is a unique quality, and it’s one that has helped the group build value year after year for its investors. For example, during the pandemic the food businesses booked strong profits, offsetting the losses from the retail side. Primark is well known for its refusal to move its operations online even in the pandemic, and it paid a heavy price as it was forced to close its brick-and-mortar stores.

The group looks well-placed to navigate today’s economic climate. According to its latest trading update (covering the 36 weeks to the end of May), sales rose 29% year-on-year. Sales at the food businesses rose 9% reflecting “price actions to recover input cost inflation and volume increases in ingredients.” Meanwhile retail sales jumped 69%, reflecting the fact that Primark stores were able to trade without restrictions throughout much of the period.

The company also said it “remains on track” to deliver a full-year adjusted operating profit margin of 10%. When so many other businesses are reporting deteriorating trading conditions, this update is quite impressive. It looks as if ABF is able to pass higher costs onto its buyers, protecting its profit margins. This sort of pricing power is an impressive competitive advantage for any organisation.

ABF is also now planning to move Primark into online shopping, starting with a click-and-collect service for children’s clothes later this year. The trial will start with just 25 shops in the northwest of England as management looks to expand sales of children’s clothing. The company believes it has a “very strong kidswear business,” but it has always been “short of space” to store and sell products. The click and collect service should help alleviate some of this pressure.

But while it is planning to introduce click-and-collect services, it does not seem as if management is planning to go fully online anytime soon .“It’s very high cost, the return rate is horrible, and I think it’s environmentally questionable,” ABF’s CEO told the market in the company’s trading update.

The company’s best qualities are often overlooked by investors

Primark is the most visible part of ABF, but the food and ingredients businesses account for 55% of sales. These defensive operations provide the group with stability and diversification, and, in my view, that’s far more valuable than anything else.

ABF might not be the most exciting business, but its valuation, 2.8% dividend yield and large family ownership, which encourages long-term investment, are all desirable qualities in my opinion.

The UK economy is facing the most challenging outlook in decades, and, unsurprisingly, the growing wave of bad news is spooking investors. While the FTSE 100 is flat year-to-date, mainly thanks to the index’s international diversification and large weighing of oil and mining stocks, the FTSE 250 is off by 16%.

However, as investors flee to safe havens, bargains are starting to emerge.

Searching for bargains amid the carnage

The headline performance of the FTSE 100 year-to-date masks the large dispersion in returns among its individual constituents. While some constituents such as BAE Systems (LSE: BA), Pearson (LSE: PSON) and Glencore (LSE: GLEN) have each returned more than 30%, others such as Hargreaves Lansdown (LSE: HL), ITV (LSE: ITV) and Ocado (LSE: OCDO) have all lost as much as 50%.

There has been a shift away from expensive growth stocks to cheaper defensives such as materials and resources. However, some high-quality businesses have also seen their value collapse as investors have thrown the baby out with the bathwater.

Borrowing a strategy pioneered by US investor Joel Greenblatt, the author of You Can Be A Stock Market Genius and the Little Book that Beats the Market, I have identified nine high-quality, cheap stocks in the FTSE 100.

The strategy, conservatively named the Magic Formula, is based around return on capital, which can be an indication of a quality business.

The return on capital figure used in the Magic Formula is calculated using the company’s earnings before interest and tax divided by capital employed (net working capital + net fixed assets). As this figure can be distorted by one year of good performance, my model uses a five-year average return on capital.

Along with this quality metric, I’m also looking for businesses that appear cheap. To screen for these companies I’m using the price-to-free cash flow (p/fcf) multiple. The combination of these two factors should help me to find FTSE 100 equities that are both high quality, and look cheap compared to the value of their cash flows.

Three cheap high-quality FTSE 100 equities Nine blue-chip stocks make it through my screen of companies with a return on capital of more than 20% a p/fcf ratio of less than ten. Two are resource stocks, which I’m going to exclude as their earnings can be volatile.

Two are tobacco stocks which I’m excluding for ethical reasons, and another two are housebuilders. While I like the housebuilding sector, earnings and returns on capital can also be cyclical, and for that reason I’m also excluding these businesses.

That leaves me with three companies: Airtel Africa (LSE: AAF), JD Sports Fashion (LSE: JD) and B&M European Value Retail (LSE: BME).

Airtel Africa: a huge growth opportunity

Airtel is the cheapest of the three, trading at a p/fcf ratio of 5.3 and has achieved a five-year average return on capital of 28.4.

Airtel operates as a telecoms and mobile money services provider in 14 countries across Africa, and is one of the best ways for investors to play the growth of the continent’s digital economy. Last year, customer numbers grew 8.7% to 128.4 million and average revenue per customer jumped 15%. Revenue expanded 21% to $4.7bn.

Airtel has been investing heavily in 4G connectivity across the continent, and has just launched its payment service in Nigeria. This could be a huge growth opportunity for Airtel as it expands to reach the tens of millions of consumers in the country that don’t have access to regular banking facilities. Looking at the stock’s current valuation, it does not seem as if the market appreciates this potential.

JD Sports: doubled down on growth

The second-cheapest stock on the list with a p/fcf ratio of 7.9 and a five-year average return on capital of 39.6% is JD Sports.

Shares in the FTSE 100 fashion retailer have been hit by the shift away from highly-valued growth stocks. Concerns about the effect high inflation will have on consumers’ discretionary income are also weighing on the retail sector more generally.

Despite these concerns, Refinitiv analyst estimates for JD Sports’ growth over the next two years have not changed. In fact, since the beginning of the year they’ve increased.

JD Sports has doubled down on its growth strategy over the past few years, setting the business apart from its competitors. It is building its presence in the US and constructing two new logistics centres in the UK and the Netherlands to meet growing demand and improve customer service.

The FTSE 100 company also stands out from the competition due to its unique agreements with big brands, JD is one of Nike’s top customers globally, giving the business leverage over this key supplier. In a competitive market like retail, these advantages and growth investments can make all the difference.

B&M: fortunes could be about to pick up

Shares in B&M European Value Retail are off more than 30% this year. After these declines the stock is trading at a p/fcf figure ratio of 8.3. It has earned a five-year average return on capital of 32.9%.

Even though investors have been dumping the stock this year, the company has historically achieved its best performance when consumer confidence is weak. The group, which sells a mix of groceries and homewares in over 700 stores, reported average quarterly like-for-like sales growth of 10.4% in 2008 to 2011.

Growth slowed over the following nine years but ramped up again during the coronavirus pandemic when B&M was classed as an essential retailer. Like-for-like sales growth averaged around 20% per quarter in 2020, before consumer confidence bounced back in 2021.

Based on these figures, as dark clouds build over the economy, B&M’s fortunes could be about to pick up, suggesting the market’s view of the enterprise is far too pessimistic.

Disclosure: Rupert Hargeaves owns shares in ITV.

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A recent post on the FT Alphaville blog describes Vodafone (LSE: VOD) as being one of the UK’s most “persistently irritating” companies. It’s hard to argue with that statement.

The group has flip-flopped from strategy to strategy over the past two decades, and shareholders have been left holding the bag. Over the past 15 years, the Vodafone share price has produced a total return of 94% compared to 114% for the FTSE All-Share Index.

That might not seem too bad on the face of it, but if you exclude dividends, the shares have returned -59%.

This performance reflects the fact that Vodafone’s shareholder equity has slumped from €92bn to €57bn over the past ten years as the company has struggled to expand in a competitive environment.

Vodfone’s challenges are twofold.

Telecoms companies require vast amounts of capital to grow and maintain their assets. For example, over the past 11 years Vodafone has spent just under €9bn (£7.6bn) a year on new equipment and technology. To put that into perspective, a business with a market capitalisation of £7.6bn would be the 48th-largest company in the FTSE 100.

And Vodafone cannot meaningfully cut this spending as it might lose market share. This is the other great challenge the firm has to manage, and it is one of the reasons why CEO Nick Reed has been calling for greater consolidation in the European market.

Vodafone has been trying to consolidate the market to improve returns

To give the company credit, it has been trying to consolidate the market. In 2019, Vodafone completed the €19bn purchase of Liberty Global assets in Europe, expanding its footprint in Czechia, Germany, Hungary and Romania.

Under pressure from Cevian Capital, Europe’s largest activist investor, Vodafone has also tried to ink deals in Spain and Italy, and is rumoured to be looking at a deal with Three in the UK.

Three UK is owned by Hong Kong infrastructure conglomerate CK Hutchison and is the UK’s fourth-largest mobile operator. Any deal is likely to come with substantial synergies, but it’s also likely to attract significant scrutiny from regulators. What’s more, considering Vodafone’s recent record, there is no guarantee it will happen.

Despite these headwinds, Vodafone’s results for the year to the end of March show it is making progress growing revenues and profits. Revenues rose 4% to €45.6bn and operating profit increased by 11.1% to €5.7bn. In Germany (a market analysts keep a close eye on as it accounts for 30% of Vodafone’s service revenue) revenue grew by 1.1%.

That said, while any growth is positive, in the face of high-single-digit inflation, the numbers are not all that impressive.

I think Vodafone’s cash flow figures are a much more accurate reflection of the company’s financial position. Free cash flow for the year totalled €3.3bn, all of which was swallowed up by dividends (€2.5bn) and share buybacks to offset “dilution linked to mandatory convertible bonds.” With more cash flowing out than coming in, group net debt increased by €1.1bn to €41.6bn.

In other words, Vodfone is paying out more than it can afford. And not for the first time: in the 2021 financial year it paid out €2.4bn to shareholders on free cash flow of €3.1bn, and spent €1.5bn buying out remaining minority shareholders in Kabel Deutschland Holding to resolve a long-running legal dispute.

The firm was able to reduce overall debt by packing up some of its infrastructure assets into a new business, Vantage Towers, which unlocked €2bn in an IPO.

The Vodafone share price looks attractive but investors should steer clear

Despite Vodafone’s global footprint, huge capital spending, revenue growth and acquisitions, the business is still relying on asset sales to keep debt under control and fund dividends.

This is only sustainable for so long. And management is now warning that life is going to get harder for the business as the “macroeconomic climate presents specific challenges”. Vodafone will be able to raise prices in line with inflation for subscribers on some of its contracts, but this could increase churn if consumers start to shop around.

While the Vodafone share price currently supports one of the highest dividend yields in the FTSE 100, investors need to look past the stock’s 6.4% dividend yield and focus on its long-term record of creating value.

On this front, Vodafone’s record is terrible. It has been selling the family silver to fund shareholder returns while borrowing money to fill any gaps. Net debt stood at €24.4bn at the end of 2012. At the end of March the figure was €41.6bn. With interest rates on the rise, the cost of this borrowing is only going to grow.

It does not appear as if Vodafone’s prospects are going to improve any time soon. Investors may be better off looking elsewhere for income.

SEE ALSO:

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When the UK voted to leave the European Union on 23 June 2016, the equity market was thrown into disarray as confused investors – many of them global, and hence rather too far away from the political action to make much sense of it – sold first and asked questions later.

However, despite that –and despite the general sense that the UK blue-chip index has been a terrible investment – over the next three and a half years, the FTSE 100 didn’t do all that badly.

It returned around 5% a year, excluding dividends (which would have added another 3% to 4% a year onto the total) before the coronavirus pandemic upended the global economy.

That’s nothing to write home about compared to US stocks, but it was a positive real return (ie, after inflation). And the same factors that kept the FTSE 100 above water during those turbulent years, could do the same now.

The FTSE 100 is a global index with a sterling hedge

Companies in the FTSE 100 derive roughly 75% of their revenues from overseas. As a result, when the pound plunged after the Brexit vote, the value of these earnings rose. What’s more, the international footprint of the index offered diversification away from the uncertainty facing the UK economy after Brexit.

These factors are still working in the index’s favour today. A weak pound will boost company earnings and international diversification will help as the UK runs headlong towards stagflation.

The make-up of the index also suggests that it could act as an inflation hedge. Energy and basic materials stocks make up around 20% of the index, with utilities and healthcare making up another 15%.

Rising commodity prices should help producers to act as a hedge against inflation, while healthcare companies tend to have pricing power, enabling them to hike prices in the face of rising costs. Utilities also offer a level of inflation protection.

Admittley, there is no guarantee the index will perform as it has in the past, even though the same qualities are present. Still, in an increasingly uncertain world, the FTSE 100’s attractive qualities cannot be overlooked.

The best of a bad bunch

There are no assets that will protect investors' wealth entirely against inflation. The only option investors have is to “choose the mistake that loses you least,” as Merryn Somerset Webb recently concluded. The FTSE 100 might not guard against inflation entirely, but it will almost certainly provide a hedge, and in this environment, that is what really matters.

If the index can replicate its performance between 2016 and 2019 (note, there’s no reason why it will) it could keep pace with double-digit inflation. If it does not, the index currently offers an average dividend yield of 3.65%. That won't beat inflation, but it’s far more than savers will get from their bank accounts.

And while they’ve been somewhat out of fashion due to the general preference for growth stocks in recent years, it’s worth remembering that dividends are a vital component of returns in the long-run.

As the most recent annual Barclays Equity Gilt Study shows, £100 invested in UK equities at the end of 1899 would have been worth just £167 (after adjusting for inflation) in 2020 without dividends reinvested. With income reinvested, the real return would have been £32,025.

As well as its income qualities, the UK market also looks cheap. The market is trading at a forward p/e of 11, around 13% below the 15-year median average.

Tracking the FTSE 100 index will not cost the world

So the market has international diversification, a large allocation towards commodity stocks, an attractive dividend yield and looks cheap – what’s not to like?

The FTSE 100 is also relatively cheap to track. Vanguard and iShares each offer tracker funds that charge just 0.06% a year in fees. That’s important even at the best of times, but in a market where equity prices may only just keep pace with inflation, you really do need to avoid paying any more than you have to – it could be the difference between a positive real return and a real loss.

There are really no good options for investors to own right now, but the FTSE 100 looks to be one of the best of a bad bunch. Investors might want to consider building some exposure to the UK’s blue-chip index as a hedge against uncertainty.

 Shell has been one of the best-performing investments in the FTSE 100 over the past three years. Including dividends, the stock has returned 28% per annum, compared to 11.8% for the blue-chip index since mid-2020. 

The company has benefited from surging oil and gas prices, following Russia’s invasion of Ukraine at the beginning of 2022, although that’s not the only factor. The pandemic crushed demand for oil and gas, but when the economy reopened, production could not keep up with demand and prices jumped. 

Today, we are still seeing the impact of this sudden jump in demand, as well as the impact on the market from Russia’s warmongering.

Shell’s fortunes start to turn  

Sadly, for Shell’s investors, it looks as if the run of bumper earnings is coming to an end. The group reported its lowest quarterly profit in almost two years today after oil and gas prices fell. More importantly, refining profit margins also slumped and this arm has been a key profit engine for the group - Shell is one of Europe’s largest hydrocarbon refiners and oil traders.

The company reported adjusted earnings of $5.1 billion for the second quarter, below analyst expectations of $5.6 billion. In comparison, in the second quarter of 2022, Shell generated earnings of $11.5 billion.

These results illustrate the challenge the company and its investors face. Oil and gas is a highly cyclical and risky business. There are many different factors which go into pricing hydrocarbons and no single producer has any impact on the market price.

And I’m not just talking about oil and gas here. I’m also talking about refined products. All of these markets are global and hypercompetitive, meaning no one business can take advantage to try and earn consistently higher profits.

This is the reason why I think Shell will always trade at a discount to the rest of the market. 

Based on current projections, the stock is trading at a forward price-to-earnings (p/e) multiple of 7.3 according to Refinitiv analyst estimates. That looks attractive. However, if oil and gas prices fall in the second half of the year company will have to make do with lower earnings. Then the lower multiple won’t look so outrageous.

Still, where the company can make decisions to boost its profits and cash flows it is. It has revealed plans to reduce capital spending from a range of $23 billion to $27 billion dollars down to $23 billion dollars to $26 billion dollars, it has also laid out plans to reduce costs from operations to improve profit margins.

Cash flow boost for shareholders 

The company has made substantial strides in reducing its debt over the past couple of years, using extraordinary profits to pay off credit or obligations. Net debt has fallen from $78 billion at the end of 2019 to $40 billion at the end of June 2023. With interest rates spiking, it looks as if this was the right decision and should save the company billions of dollars in interest payments.

The group has also been using its windfall to reward shareholders. It increased its quarterly dividend by 15% for the second quarter of 2023 and has committed to repurchase $3 billion in shares by the end of October. Over the past 18 months, the group distributed $26 billion to shareholders representing almost 10% of its market value through a combination of dividends and share repurchases. The stock offers a dividend yield of 4.6% today. 

The bottom line  

 So what does this all mean for investors? The numbers clearly show this is a cyclical business where earnings can jump up and down. Shell has made a lot of money over the past two or three years, and it has used this cash wisely, but it’s unclear if the company will be able to repeat this performance as its future will be determined by the state of the global oil market. 

That’s something investors need to keep in mind if they’re considering adding this stock to their portfolio. 

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The first quarter of 2022 is over.

It's a natural point at which to take stock of what's happened in markets.

It's also a completely arbitrary point, of course. Just because markets have been doing something over the past three months doesn't mean they'll keep doing it.

Yet, arbitrary or not, taking a snapshot of markets can give us an idea of what the overall narrative is at any given time.

And it's very clear from the first quarter of this year that the big stories in investment are now dramatically different to the ones that drove the post-2009 bull market...

The FTSE 100 is doing well – what's gone wrong with the world?

One of the most obvious changes in the investment environment is that the UK's headline stock market index isn't clutching tightly to the wooden spoon for once. That's quite the shift.

During the first quarter of 2022, the FTSE 100, which comprises the 100(-ish) biggest (in terms of market capitalisation) companies listed on the London Stock Exchange, gained 1.8%, notes George Steer in the FT.

You may not be cracking open the champagne on that sort of gain (certainly not with inflation sitting at its present levels). And if you'd been more adventurous, investing in Brazil say, you'd be up a whopping 34.3%, says Morningstar.

But it's rather a lot better than if you'd invested in most other major developed global stock markets – or British ones for that matter.

The FTSE 250, which comprises the next 250(-ish) companies, lost 10.6%, while the biggest companies on Aim – London's junior market - lost an even more brutal 16%.

As for international comparisons, eurozone stocks (as measured via the Stoxx 600 index) fell by 6.5%, while the S&P 500 dropped 4.9%.

There's a pretty straightforward story to tell here. The FTSE 100 has done reasonably well for two main reasons. One is that it has been the least popular developed market in the world for a long time now, so it was starting from a low base. That shunning was partly due to Brexit.

Two - which has nothing to do with Brexit – is that it is full of the sorts of stocks that everyone has hated for the duration of the post-2008 bull market. The FTSE 100 has banks (at the heart of the last bubble); miners and oil companies (hated because they're the opposite of both ESG and "digital" assets); and a distinct lack of hot tech stocks.

Oh and it's a dividend-heavy index in a world that had decided that regular payouts to investors showed that a company had run out of imagination.

So in a world where investors have decided that "value" investing is a dirty word, it's little surprise that the FTSE 100 index was hated.

Clearly that's changing now. Even before Russia invaded Ukraine, commodity and energy prices were surging. Inflation finally stopped being described as "transitory" in December last year as the Federal Reserve "retired" the word.

Meanwhile, on the other side of the equation, anything speculative (in other words, any asset where profits are a distant prospect) has struggled. "Growth" has lost its popularity. "Virtual" has become less appealing. "Expensive" is no longer a synonym for "high-quality".

This helps to explain why the US in particular – previously the world's leading stock market by far – has started to struggle. It's far more "growth-y" and "tech-y" than the FTSE 100.

The trend is clear. The rationale is pretty clear too. The big question now is: is it likely to continue?

How to invest for a continuing shift to value from growth

On the "big picture" level, a lot of this boils down to what you think will happen to interest rates, inflation and the economy over the coming year.

If you think that inflation will drop back down and that the world's central banks are going to be clear to cut interest rates, but that we'll scrape by avoiding a recession, then we could probably flip back to the good old days of growth trumping everything and everything being hunky-dory in a slightly glum manner.

If you think that inflation will persist, that central banks are caught between a rock and a very hard place, and that we might end up with the economy being dragged down by soaring living costs even as staff agitate for higher pay to compensate and countries scramble to secure scarce supplies of key resources – well, we can probably expect more of the same.

I'll admit I find scenario number two or some variation thereof the most likely option here. I would prefer a more cheerful outcome (and if wages start rising in a persistent manner, that would make me more optimistic about the economy, if not about earnings prospects).

But overall, it's hard to see how we go back to the previous "secular stagnation" scenario which sounded very gloomy but in practice, entrenched the dominance of the top performers and wasn't much of a problem as far as Wall Street was concerned.

How do you play this? We've looked at lots of ways to play lots of different commodities, from copper to silver and platinum. You could also invest in value-oriented investment trusts or those which are aimed at protecting you from inflation.

The other option is to look at a simple FTSE 100 tracker fund. It won't give you pure exposure to all of the things that will do best out of any shift from growth to value, but it is a cheap option for investing in the overall shift.

On that note, for more on the debate over passive investing and its impact on markets, you really should listen to this week's MoneyWeek podcast, in which Merryn chats to Robin Wigglesworth, FT journalist and author of Trillions, an in-depth history of index investing and its impacts. Have a listen here.

Law Debenture investment trust (LSE: LWDB), a trust run by investment manager Janus Henderson, and one of the components of the MoneyWeek model portfolio of investment trusts, recorded a fall in its premium relative to its net asset value (NAV, the value of the underlying assets held by the fund).

In the month to 30 April, the trust recorded a premium of 1.01%. This is lower than the previous month where the premium was 1.7%.

The trust’s net asset value slipped by 0.6% in the month to 788p per share, compared to the FTSE all-Share index benchmark’s rise of 0.3%. The trust’s share price fell 796p.

However, the trust has still outperformed its benchmark index over the last tear, as the trust’s one-year NAV total return (with debt at fair value) was 10.8%, higher than the benchmark’s return of 8.7%.

I3 Energy, an independent oil and gas company, was the largest positive contributor to relative performance as the company benefited from “higher commodity prices and good cost control”.

Large defensive companies such as Unilever, British American Tobacco and AstraZeneca were the largest detractors from relative performance due to the fund’s underweight exposure in these firms.

These companies saw robust performance during the month as fears of higher interest rates and higher inflation continued to accelerate.

The trust said it opened a new position in agricultural and pharmaceutical company Bayer due to it trading at “an attractive valuation”.

Law Debenture added that it believes Bayer is being underappreciated by the market.

The trust closed positions in Glencore and BHP following a period of strong performance. In March, BHP was the trust’s biggest contributor to relative performance.

GlaxoSmithKline and Shell remained the trust’s two top holdings, representing 3.2% and 2.9% of the fund, respectively.

Oil major BP moved up from fifth place, to third place, representing 2.4% of the fund.

British bank HSBC was the fourth biggest holding, representing 2.3% of the fund.

Mining company Rio Tinto fell from third place to fifth place, holding a 2.3% stake in the trust.

National Grid, a British publicly listed utility moved from seventh position to sixth position. The company represents 1.8% of the trust.

British bank Barclays moved from ninth place the previous month to seventh place. It represented 1.8% of the fund.

Miner Anglo American moved from sixth position to eighth place. The mining company represented 1.7% of the trust. BHP Group was omitted from the top ten holdings.

Sewage and water company Severn Trent moved from tenth place to ninth position. The company’s stake in the company was worth 1.7% of the trust.

Insurer Aviva, which was not part of the trust’s top ten holdings in March, took the tenth spot, representing 1.6% of the trust.

The Law Debenture Corporation is unusual in that it is an investment trust and also a professional services business. Founded in 1889 and listed on the London Stock Exchange, the trust’s objective is to achieve a higher rate of total return than the FTSE Actuaries All-Share Index Total Return.

When Peter Spiller took over the management of the Capital Gearing Trust (LSE: CGT) in 1982, it had assets of just £500,000. Now, 39 years on, the fund is valued at £864m and its shares have multiplied 237 times in value, equivalent to a compound annual return of 15%. Under Spiller, the trust has only had one down year, 2013, when it lost 2%. This performance far exceeds that of all stockmarket indices, both in terms of performance and volatility.

Returns have been more pedestrian in recent years. A five-year return of 41% reflects a compound annual return of 7.1%, a little ahead of the FTSE All-Share index, but well behind global markets. This has not prevented the shares from trading at a persistent premium to net asset value (NAV), currently 3%, which has enabled CGT to continue issuing shares. Its management fee of just 0.35% adds to the attraction.

Inflation is a key concern

In recent years, CGT’s managers have been very cautious. They have feared the return of inflation and believed that equity markets are overvalued. The trust’s exposure to “funds and equities” comprises just 42% of the portfolio: this includes 17% in property, 4% in loan funds and 5% in infrastructure funds, and just 17% in pure equities. Index-linked government bonds account for 30% of the portfolio, conventional government bonds 14%, corporate bonds 7%, cash 4% and gold 1%.

Concerns over inflation and equities’ valuations are now widespread, so these allocations seem prudent. But exposure to equities and funds is now the highest it has been for ten years and double that of 2011. CGT’s managers have been crying wolf for a long time, but perhaps their time has now come.

“People get what they are not worried about,” says Spiller. In 1965, the focus was on employment, not inflation. Only after 15 inflationary years did the focus switch to rising prices. In the 1960s, US inflation built gradually thanks to “relentless” fiscal expansion and negative real interest rates; it was “aided but not caused by oil prices”. Inflation became the “cancer of modern civilisation”, creating “tremendous social tension”.

The turning point came in 1979. “Subsequent disinflation lasted longer than expected, helped by demographics (notably the fall of the Berlin Wall and opening up of China), globalisation and technology, but those factors are now largely spent, if not reversing. Instead, we have green inflation, structural change, such as Brexit, and the possible pricking of asset bubbles.” The consensus is that inflation will fall, but perhaps not back to target.

A sensible investment

America’s total debt-to-GDP ratio has doubled to 296% since 1980 and higher real interest rates are likely to be needed to control inflation. A recession next year is increasingly likely, but the probable response will be higher fiscal deficits, lower rates and more quantitative easing, causing a ratcheting up of inflation. Eventually, central banks and governments will be forced to clamp down, as they did in 1980. Spiller believes that low asset values will open up another era of investment opportunity.

CGT’s strategy focuses both on making money and, more importantly, on not losing it. The exposure to gold is surprisingly low, but Spiller argues that gold is not undervalued relative to historic inflation. Also “gold behaves very like US Treasury inflation-protected securities (TIPS) and we find it easier to analyse TIPS”. US TIPS are preferred to UK index-linked gilts as they offer better value and Spiller expects sterling to fall. Still, exposure to sterling is 54% of the portfolio. Some might think CGT’s strategy is too cautious. But, as one happy shareholder said, “I trust you to hold my coat while I fish in riskier waters”. On that basis, CGT should have universal appeal.

“With price increases slamming economies from all directions,” markets are getting increasingly jumpy, says Susannah Streeter of Hargreaves Lansdown. Investors also fret that weakening macroeconomic data could herald a slowdown. No wonder that in recent weeks concerns about stagflation, the combination of economic stagnation and high inflation, “seem to have turned from niggling worries to an anxiety attack”.

Markets have hit a wall

America’s S&P 500 finished September down 4.8%, its worst month since the crash in March 2020. The selling continued into this week, with the technology-focused Nasdaq Composite tumbling by 2.1% on Monday. Highly-valued technology shares are particularly vulnerable to rising interest rates and bond yields (which make bonds more appealing relative to equities). The FTSE’s exposure to commodity stocks has spared it the worst of the sell-off: the index is down by about 1% since the start of September. Yet markets seem gloomy about the outlook for the wider British economy.

Last week the pound tumbled to $1.3441 against the dollar, its lowest level of 2021, notes Philip Aldrick in The Times. That is worrying because the Bank of England is expected to raise interest rates sooner than other central banks, which should be giving sterling a lift. There are signs that UK “growth is flagging” just as energy and food prices soar; British wage growth is “the highest since 2008”.

If stagflation takes hold then “the Bank of England can do little about” it, says Chris Dillow in the Investors’ Chronicle. It can raise rates to fight inflation or loosen policy to stop stagnation, but not both. Some of the current inflationary pressure should prove temporary: “labour market mismatches should fade as firms… train new staff”, while the commodity cycle will eventually turn, as it always does. If there is one area for concern, it is that the current shock is exposing Britain’s chronic problem with productivity, which has grown at “just 0.3% per year” over the last 14 years.

Goodbye “Goldilocks”

Global markets have enjoyed a “Goldilocks” environment for much of this year, says Olivier Marciot of Unigestion. That combined “record growth” with easy monetary policy from central banks, both of which boost stocks. But as inflation spikes and central banks rein in support, that favourable alignment of the economic planets has “probably come to an end”, driving the selloff.

Since 2008, investors have lived by “TINA”: “there is no alternative” to investing in stocks, says Jon Sindreu in The Wall Street Journal. The logic goes that whenever the economy takes a hit then central banks will step in with easy money to rescue stocks. So equities always go up. The fear now is that inflation will force central banks to hike rates no matter how much that hurts markets. Yet “every precedent suggests that… officials will course-correct whenever” bond markets throw a big enough tantrum. The recovery could also prove weaker than expected, enabling central banks to keep policy loose. “There is still no alternative” to TINA.

“Put 10% of your portfolio in gold and hope it doesn’t go up,” says a Wall Street adage. Never has the advice seemed more apt than during the past 12 months. Stocks have been almost unstoppable. America’s benchmark S&P 500 index is about 40% higher than it was a year ago. The UK mid-cap FTSE 250 has done almost as well. Even the FTSE 100 blue-chip index has jumped – and by nearly 1,000 points.

And yet gold, at around $1,790 an ounce, is down by 15%, and silver by more. A year ago, gold was north of $2,000/oz. Silver was testing $30/oz. Today gold is at $1,790/oz; silver, $23/oz. Find me another asset that has fallen in price with all the quantitative easing, or money printing, that is going on – there aren’t many.

They say a rising tide lifts all boats, but gold and silver have both been bypassed in the broad commodities rally. The brutal truth is this: over the past year precious metals have been outshone by virtually every other asset in the world.

But if you followed the wisdom of the adage, you’ve done well. Your gold was your insurance premium. Everything else went up. Better that than the other way round. That gold hasn’t been appreciating means all other sectors are doing just fine.

You can argue that the growth is illusory – it might well prove to be – but for now markets aren’t buying it. Gold’s problem, says Charlie Morris of The Fleet Street Letter, is that “the economic recovery is going too well”. But to us gold speculators, insurance is boring. We want gold going to $2,500 and gold stocks trebling and quadrupling. Still, we should be careful what we wish for. The inflationary reality of that scenario may not be so pleasant.

An analogue asset?

Is there even any point in having gold anymore? Now we have bitcoin: digital gold in a digital age. Gold’s beauty may not have been replicated, but its scarcity has – and that is what gives it value. The digital economy is where the growth is. You don’t have to go through ten years of hell to get a mine producing. You can code an app and get it to market in months. Investors get a quicker return and so the sector attracts more capital. Gold, meanwhile, this most analogue of assets in a digital world, plods on.

Last weekend saw the 50th anniversary of President Richard Nixon taking the US off the gold standard. It is ironic that it should occur as the US bails out of Afghanistan, another of its disastrous foreign interventions (see page 8). The US abandoned gold to finance its war in Vietnam. In August 1971 French president Pompidou sent a battleship to New York to collect its gold holdings; the British asked the US to prepare $3bn worth of Fort Knox gold for withdrawal; and President Nixon told the citizens of the United States in a televised address that the United States would no longer honour its promise to redeem dollars for gold.

When asked about the impact this would have on foreign nations, Nixon’s answer was, “I don’t give a s**t about the lira”. Nixon floated the greenback because he did not have the gold to pay for the military infrastructure the US had built to drop four million tonnes of explosives on Southeast Asia. Like income tax, quantitative easing and masks, floating the dollar was touted as a temporary measure.

For the first time in history gold played no part in the monetary system. “What a tragedy for mankind,” said US Federal Reserve chairman Arthur Burns. He was right. Purists – of which I am one – will trace so many of the world’s problems, from spendthrift governments and their bloated states to house-price inflation and inequality, to that decision.

Gold bugs have always maintained that a return to gold is inevitable. History shows the fiat-money systems inevitably die. An inflationary collapse is all but unavoidable. Yet here we are 50 years on and a return to gold hardly seems imminent. The only people talking about it are nutters on chat boards. The fiat-currency system may be a mess and its consequences verging on the despicable, but it is surviving and functioning.

Inflation has arrived

It’s clear that inflation is here. House prices are displaying double-digit inflation. A pint of beer that 18 months ago cost me £4 now costs me £6.50. Materials costs are through the roof. School fees are up. Wages are rising. Heck, even the Bank of England admits there is inflation. And yet gold is down.

Last week, at 11pm on Sunday night, when markets were particularly thinly traded (Japan and Singapore were on holiday), somebody dumped 100 tonnes of gold on the global market – $4bn worth. Gold miners typically sell $10bn on a given day, and during normal working hours, not when markets are at their least liquid. Some reports are that it was a margin call, others that it was somebody trying to manipulate the price lower. Who knows? But who wants to take on a market like that?

Gold analyst Ross Norman, CEO of metalsdaily.com, argues that “all things considered gold actually fared well with such an onslaught”. Ross constantly tops the London Bullion Market Association’s annual forecasting competition, so we should heed his advice. Despite the gloom of your author, he is bullish.

“Investors’ confidence has been shaken by the rapid take-down in gold prices, but the market is building a base. Don’t expect runaway prices; this is seasonally a weak period. But, having ground out a bottom, the path of least resistance should be higher. Some will point to burgeoning debt [or] inflationary expectations and question why it’s not much higher.”

“The reality is the market has had to absorb a steady outflow of institutional sales amounting to about 200 tonnes so far this year, coupled with weak demand from India and... China. Retail buying in the form of coins and bars is one of the few positives. I suspect [that this episode] has shaken weaker hands from the market leaving gold to perhaps now surprise to the upside, but as always, patience is required.”

Ah, patience! Ten years ago gold was $1,920, higher than it is today. Think of all the money that’s been printed. There is pretty much no other asset, certain commodities aside, trading below where it was ten years ago. Particularly the asset you buy to hedge against money printing.

You can cite all the arguments you like about fiat money, inflation, debt, suppressed interest rates, money printing, unsustainable spending, misleading government statistics. I agree with them all. The gold price “should” be going up. It “should” be two or three times higher. But it isn’t.

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Even if you couldn’t care less about investing, you’ve probably heard of the FTSE 100. The FTSE 100 is the best-known stockmarket index in the UK. In effect, it sums up the fortunes of Britain’s biggest listed companies into one single number, by combining them all into one hypothetical portfolio.

Why is this useful? It gives a representative snapshot of how strong or weak the market in big UK companies is at any given point in time. But more importantly, it serves as a useful benchmark.

If you invest with a fund manager who says they will put your money into big UK companies, then how do you know if they are doing a good job or not? One way to tell would be to compare their performance to that of the FTSE 100. If they manage to beat the index over the long run, it suggests that their stockpicking skills are adding some value for you. If not, then why pay them to manage your money?

There are many different ways to construct an index. Most indexes, including the FTSE 100, are based on market capitalisation – that is, the share price of each company multiplied by the number of shares outstanding. In other words, the companies deemed most valuable by investors carry the most weight in the index.

The best-known indexes tend to be the ones that represent individual countries’ stock markets. Other indexes you may well have heard of include the Dow Jones or the S&P 500 in the US, and the Nikkei in Japan. However, there are literally thousands of different indexes available, and there are many different ways to build them.

As passive investing – which aims to track an index, rather than beat it – has boomed in popularity, index providers have become huge businesses. As investor demand for index funds that track specific themes, or specific investment styles has grown, index providers have created custom indexes to back these investment products.

Some fear that the boom in indexing may distort the flows of money into financial markets in disruptive ways. However, there is no doubt that index funds can be a very convenient and cheap way to build a diversified long-term investment portfolio.

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The banking sector has been a significant drag on the UK market. Since 2006, the All Share index has risen by 19% but the five banking constituents of the FTSE 100 have, on average, fallen by 70%. As Nick Brind, co-manager of the Polar Capital Global Financials Trust (LSE: PCFT), notes, this was not just the result of the financial crisis. Since mid-2013, the five have slipped by 30% while the All-Share has returned 46% and the MSCI Global Financials index 77%.

A difficult domestic market

It’s not hard to see why. With interest rates at zero, it is virtually impossible for UK banks to make sufficient margin to cover costs, bad debts and a reasonable return on capital. Fee income is under relentless pressure from specialist providers of insurance, investment advice and foreign exchange, competition in the commercial market is intense and investment-banking income has withered. Regulators stopped banks paying dividends in 2020 and their overall rate of corporation tax is 8% higher than standard. “UK banks are not a good guide to the opportunities in the sector,” says Brind.

Banks in the US and emerging markets have fared better so PCFT has prospered, returning 102% since mid-2013 and 54% since the trust survived a continuation vote at the cost of buying in 40% of its shares last April. This has led to an acceleration in relative performance, which has been 14% ahead of the global financial index since then. The shares now trade at a small premium to net asset value (NAV), enabling PCFT to reissue most of the shares it bought back. Assets have increased to £250m and though the yield has dropped below 3%, dividend growth is likely to resume this year.

Over 90% of PCFT’s portfolio is outside the UK; 63% is invested in banks, 14% in insurance, and 10% in “financial technology” (such as PayPal and Mastercard). Nearly half of assets are in North America and 20% in Asia ex Japan. The sector has started to outperform but Brind believes there is much more to go for.

“Banks underperformed in the pandemic by more than in the global financial crisis,” he says, “but the rise in loan losses has been muted while payments of deferred interest have resumed. US banks are incredibly well reserved so provisions are likely to be released in 2021-2022 , enabling a resumption of share buybacks.” A strong recovery in earnings is expected, helped by the steepening of the yield curve. “This is very good news for the sector as the performance of banks is highly correlated to bond yields.”

Rising interest rates bode well

A 1% rise in US interest rates, says Brind, causes bank earnings to rise 12% in year one and 20% in year two. The discount of share prices to book value for global banks has narrowed from 30% to 10% but Brind sees 20% upside in the US and 30% globally, with asset values boosted by the release of provisions as well as by earnings. Given how well the banks withstood this crisis, it is even possible, he thinks, that they could be rerated in a more benign regulatory environment.

Exposure to emerging markets has been reduced despite the structural growth opportunities and a sector that is “more profitable and more dominant than in developed markets”. Financial technology companies have benefited from an acceleration in the shift of transactions online while pricing in insurance markets is firm. Covid-19 losses are estimated at $60bn-$70bn but balance sheets are strong and valuations moderate.

Financials usually out-perform by 23% in the 12 months from market lows, says Brind, “but have barely outperformed since the Covid-19 low and have halved relative to the MSCI World index since 2006”. Given the encouraging outlook the trust is geared, with borrowings of 9% of net assets.

The FTSE 100 breached the 7,000 mark at the end of last week. That's the highest it's been since February 2020. Investors can be forgiven for feeling a little underwhelmed – most other indices have already breached their pre-pandemic highs. But might this be the start of bigger and better things for the UK's headline index?

To say that the FTSE 100 has not been the world's best equity investment is an understatement. It is now a whopping 1%-or-so higher than the 6,930 point that marked its dotcom peak in 1999. At first sight, that means the FTSE 100 has effectively gone nowhere in more than 20 years. Now, it's not quite that bad. The FTSE 100 is one of the world's most income-heavy stock indices. So you shouldn't judge it on capital gains alone.

But even if you account for dividends (and you should – note that Germany's index, the DAX, is a “dividends-included” index, for instance), the FTSE does not have a history of shooting the lights out. For example, the FTSE's all-time record high came in May 2018, at 7,877. If you'd reinvested your dividends between the FTSE 100's dotcom-era high and its 2018 high, you'd have roughly doubled your money, even with the index itself barely rising in terms of capital value.

But doubling your money is a poor performance if it takes nearly two decades to do so, and it's much much worse when you look at what you could've won (to quote the late lamented Jim Bowen). Obviously, in terms of major stock exchanges, the Nasdaq has been the place to be in recent years: it peaked at just under 5,000 in March 2000. It's now above 14,000.

But you don't have to go that far afield. Indeed, the far-more domestically-focused FTSE 250's dotcom-era peak was just under 7,000; its pre-pandemic peak was around 22,000 in December 2019. Today, it's higher than that. In other words, you've more than trebled your money (and that's excluding dividends!) in the same time that you've barely doubled it on the FTSE 100.

Anyway, after that 2018 high, the FTSE 100 meandered around for a while, before crawling to within touching distance of that record again in January 2020. We all know what happened then. The question now is whether the FTSE 100 will play catch-up, or whether you'd still be better focusing on all of the indices that have already surpassed their pre-pandemic peaks.

That which was cheap shall be expensive

If we're talking about what's gone wrong, then from a global investor point of view, you can make an argument that Brexit definitely put a lot of big institutions off. They have a whole world of stocks to play in – if they can easily write off a small part of that universe then they won't have a problem with doing so. But, as you can see from the FTSE 250's performance, Brexit clearly isn't the whole story by any means.

One deeper issue is that the FTSE 100 does have a lot of stocks that are simply out of favour. The banks are mostly FTSE 100 stocks; the banks had their equivalent of the dotcom bust in 2008, and they're taking even longer than the internet stocks did to come back from it. Oil is a big component of the FTSE 100. Oil is largely viewed as yesterday's fuel and has had a particularly turbulent few years, even before the pandemic, as the supply landscape has been turned upside down by US shale oil. Another big component is commodities, which enjoyed a big bull market in the 00s, then a massive bear market from about 2011 to 2016. They've recovered since then but it's only since the post-pandemic bounce that investors seem to be more convinced that the rally has legs.

To cut a long story short then, the FTSE 100 has struggled due to being particularly heavily weighted towards “dinosaur” stocks. That is, industries and companies that are deemed either to have had their day, or which are at the “boring” end of their respective sectors. So you've got banks rather than fintech. And, to pick on a more topical industry, while the FTSE 100 does have some drug stocks, we're talking about big pharma rather than exciting biotechs.

AstraZeneca has certainly not been a boring company to follow (though recently for many of the wrong reasons) but its rival in the FTSE 100, GlaxoSmithKline, could be a contender for dullest stock of the decade, certainly in terms of performance (I own it, by the way). No wonder an activist investor is getting involved now (we might look at that story in more detail another day).

Anyway – the point is, the FTSE 100 has been neglected for fairly obvious reasons. In many ways, it's been the opposite of the Nasdaq. The FTSE 100 is an index full of boring old stocks – the Nasdaq is an index full of exciting new economy stocks.

The arguments for the FTSE 100 now are twofold. One is that it's cheap relative to most global markets. Two is that a strong recovery will arguably be better news for the boring old stocks than for the exciting new stocks. The former are cheap and less vulnerable to higher interest rates or inflation, the latter are expensive and more vulnerable to a change in the macro backdrop.

Arguably, what helped the FTSE 100 claw above 7,000 last week was clear evidence of a strong recovery in the US as the data beat expectations. In short, the things that have made the FTSE 100 unfashionable are now the same things that might make it fashionable again. So it's definitely worth having some exposure if you don't already.

We've looked at the market on several occasions in MoneyWeek magazine over the last few months. If you're not already a subscriber, you can get your first six issues absolutely free when you sign up now.

The equity markets have dramatically changed the script from last year. The technology and growth stocks that were flying all through 2020 have stalled, while the “value” companies that no one was interested in are seeing a dramatic revival. Tesla dropped from $880 a share to below $650. Spotify dropped from $350 to $270.

Overall, the tech-heavy Nasdaq index dropped by 10%, taking it into correction territory. And yet, at the same time, the wider market was hardly impacted. The more broadly based, industrial Dow index marched steadily on, hitting record highs. The two indices have not diverged so significantly since 1993.

What analysts refer to as a “great rotation” is underway: investors are taking their money out of growth companies, and putting it into value on a scale not seen for many years.

The Zoom boom is over

It is not hard to understand why. After an epic run, many tech stocks had started to trade on crazy valuations. Covid-19 accelerated the digital economy, compressing ten years of advances into a few short months. But even so, it’s not clear that Zoom is really worth five times what it was a year ago.

At the same time, the rapid rollout of vaccination programmes in the UK and US means lockdowns should be lifted soon, and massive stimulus programmes, again led by the US, means economies should bounce back strongly. The result? Lots of companies in basic, traditional industries should witness a rapid recovery. Airlines, retailers, banks, property firms, manufacturers, and food and drink companies, should all be doing a lot better.

Every major index has plenty of “value” companies on it, but one stands out: Britain’s FTSE 100 (Germany’s Dax comes a close second). Indeed, you have to look pretty hard to find anything that looks like a technology company in it at all: Rightmove, Just Eat and Ocado are the only three, and two of them are in food delivery, which is at the more basic end of the spectrum.

Other than that, it’s all banks, miners, oil companies, drugs conglomerates, and consumer-goods giants. In other words, the FTSE is primarily a “value” index, with a high dividend yield and plenty of cash flow, but not a lot in the way of excitement.

For the last 20 years that has condemned it to a terrible performance. It is still below the high it reached in 1999, while every other major rival is way above it. If it had simply kept up with the S&P 500 it would be over 15,000 by now. If it had kept up with the Dax it would be over 12,000.

Sure, it has been weighed down by a host of factors. Brexit definitely didn’t help, nor did the interminable arguments about how to get out of the EU that dominated the four years after we voted to leave. Neither did the financial crash of 2008, nor the sluggish growth that followed. Even so, the FTSE’s underperformance was largely down to the dominant sectors in it being completely out of fashion. The FTSE has performed dismally for so long that most investors have simply given up on it.

A modest target

If the “great rotation” has legs, that will start to change, and potentially very quickly. Brexit has been resolved; the vaccine roll-out is going well; the chancellor and the Bank of England have pumped massive amounts of money into the economy to keep demand alive. Perhaps most importantly of all, the FTSE’s dominant sectors are coming back into fashion.

If miners are booming once more, then in Rio Tinto and BHP Billiton, the FTSE is home to some of the largest in the world. As energy revives, it has BP and Shell. As healthcare is in vogue, it has GlaxoSmithKline and AstraZeneca. In banking, it has HSBC and Barclays. None of these are especially exciting businesses. But they are solid, reliable, pay good dividends, and will benefit from a growing, consumer-led global economy. They are all “value” stocks, and cheap ones as well.

How high could all this push the FTSE? To 10,000 by the end of the year? It is not as crazy as it would have seemed just a few months ago. If the “great rotation” keeps going, it is a modest target.

The news late last year that the value of a single US company, Apple, had overtaken that of the entire FTSE 100 index marked another milestone in the long decline of the UK equity market. How has this happened, and is the trend reversing? If so, then the many British investors with a home bias could recover some of their missed performance relative to global markets.

It is 37 years since the FTSE 100 was first constructed as a market capitalisation-weighted index of the largest 100 companies with a full listing on the London Stock Exchange. Until then, investors had to make do with the FT30 index, unweighted, idiosyncratically composed and calculated only every hour, and the All-Share index, calculated daily.

The combined market value of the initial 100 companies in 1984 was just over £100bn and the index was based at 1,000. At the end of January 2021, it stood at 6,407, representing an annual gain of 5.1%. But it was valued at over £1,500bn, reflecting an annual growth rate of 7.6%. This implies that 33% of the growth in value of the index has come from net share issuance.

The index reached 6,930 at the end of 1999 and only passed that level again at the end of 2016, peaking at 7,877 in May 2018. Now, it is only 11% above the level of 15 years ago. Between the FTSE 100’s inception and the end of 2005, UK equities had returned a compounded annual average of 12.5% (8.5% in real terms). Since then, the annual total return of the FTSE 100 has been 4.7%, before tax, only 2% ahead of inflation.

In 1984, the largest company in the index was BP, valued at £7.4bn, and the 100th was valued at just £100m. Now, the largest is Unilever at £104bn and the cut-off for the 100th is around £3.8bn. Only 40% of the capital of Royal Dutch Shell, then number two, was included in 1984, valued at £6.5bn. Now, both of Shell’s share classes are included, valued at £102bn. It’s still number two, followed by AstraZeneca at £95bn. BP’s market value is now £51bn, but it acquired Amoco, ARCO, Britoil and Burmah (BP’s founding shareholder in 1905) along the way, while the government sold the 50% stake it held in 1984.

The FTSE 100 is the Premier League of stockmarket indices

Every quarter, two or three underperforming constituents are dropped from the index and replaced. As in the Premier League, most of those exiting soon return and most of those promoted depart a few quarters later, with only the takeover victims disappearing forever. But over time the changes are striking. By 2005, only 42 of the original constituents were still in the index and only 23 had been in it throughout.

Now, those 42 are down to 28. Wikipedia lists 277 past constituents. Many, such as Rowntree, Boots, BOC and GKN were taken over. Others, such as Wellcome, Wimpey and Sun Alliance, merged to form new FTSE 100 companies. Some, such as Maxwell Corporation, Ferranti and Polly Peck collapsed due to fraud, or simply went bankrupt (Intu, Debenhams and British & Commonwealth). The list includes now-forgotten companies, such as Baltimore, Psion and Thus, which proved to be flashes in the pan. Many more are still listed but not in the FTSE 100, either because they have tripped up but could return, such as Serco, Capita and M&S, or because they have simply been left behind (Hiscox and Alliance Trust).

Bank stocks and oil giants are fading

The survivors are either a shadow of their former selves or have changed radically. BT was once the largest company in the FTSE, but Unilever’s market value is now more than eight times bigger. The banks are no longer giants of the market and the oil majors are fading. Reed and Pearson were conglomerates, but are now focused on publishing. British American Tobacco (BAT) disposed of its financial services, retailing and cosmetics arms and Whitbread no longer brews beer. In 1984, Imperial was a brewer, a pub owner, a producer of frozen and snack foods and a UK-only tobacco company. Now it is a global tobacco group.

Digging deeper, however, shows that there has been rather more continuity. Distillers was acquired (controversially) by Guinness, which then merged with Grand Metropolitan to form Diageo, spinning off Intercontinental Hotels to form two current FTSE 100 constituents. Great Universal Stores has gone, but two of its businesses, Experian and Burberry, are prospering. ICI is no longer with us, but its pharmaceutical division, Zeneca, now thrives within AstraZeneca. Initial Services, once a part of BET, is now half of Rentokil Initial.

Many current FTSE 100 constituents were either promising mid-caps in 1984 (Smiths Industries, Bunzl, SEGRO), or still small caps (Spirax Sarco, Weir, Halma, Ashtead, Berkeley Homes). Others were not listed or even founded then, including London Stock Exchange, Hargreaves Lansdown, Just Eat, Ocado, AVEVA and Rightmove. Herein lies a paradox: though nearly all of the FTSE 100’s underperformance against Wall Street has occurred in the last 15 years, there is more evidence of innovative companies now than there was then.

A lack of organic growth

In 2005, the weaknesses of the UK market were all too apparent. Very few companies had climbed into the FTSE 100 primarily through organic growth; among the few who had were Sage, Next and Capita, and the latter subsequently fell flat on its face. WPP, which made supermarket trolleys until Martin Sorrell took control, doesn’t count as he built this global marketing and advertising giant by acquisition.

Fifteen companies (up from three in 1984, but down from a peak of over 20) were the result of privatisation. These had benefited from their transfer to private ownership, but were running out of steam and into regulatory strife. Only seven remain in the index. Demutualisations, such as Northern Rock, Alliance & Leicester and Halifax, accounted for another six, but this proved to be the road to ruin.

Many companies had grown through takeovers, despite ample academic evidence that mergers and acquisitions were more likely to destroy than to add value. BTR had risen from small beginnings to be one of the largest companies in the market through the acquisition and subsequent rationalisation of underperforming companies, but, as Invensys, was barely surviving in 2005. The equally acquisitive Hanson group had broken itself up with Imperial as the sole listed survivor. Electronics and defence giant GEC remained wary of acquisitions, debt and capital investment until it threw caution to the wind, changed its name to Marconi and committed corporate suicide via a spending spree in the technology bubble.

Other participants in the merger mania of the late 1990s, such as the oil majors, survived as unwieldy corporate dinosaurs, destined for long-term underperformance. Vodafone had been spun out of Racal Electronics as one of three companies to be awarded a UK mobile licence in the 1980s, but expanded globally by acquisition. The share price of Glaxo, which had absorbed Wellcome and SmithKline Beecham, was suffering from indigestion and is still 38% below its 1999 peak. The banks were busy acquiring and overexpanding. The accepted wisdom in boardrooms was that companies had either to acquire or be acquired.

While the FTSE 100 contained just one technology stock in 2005, the S&P 100 contained 19. It also included 14 healthcare companies, including some, such as Amgen and Genentech, which had emerged from biotech status. Despite the parallel boom in mergers, US companies had relied far less on share issuance for growth. Those companies that were highly acquisitive, such as GE, then the largest US company, have paid a heavy price in subsequent underperformance.

Though there is now far more innovation in the FTSE 100 than 15 years ago, structural weaknesses remain. Technology comprises 28% of the S&P 500 and healthcare another 14%. Technology accounts for nearly 10% of the MSCI Europe (ex UK) index and healthcare nearly 16%, but just 1.3% and 10% in the UK. Energy is 9% and materials (mostly mining) 13% of the FTSE 100, but in the US these two sectors comprise just 5% of the market; in Europe, 10%.

An improving outlook

The FTSE 100 still contains eight miners, down from 12 in 2011. Some of these maintain little more than an office here. For them, a UK listing is a flag of convenience, preferable to a home listing in a small market. This also applies to Mondi (Austria), Smurfit Kappa (Ireland), and Coca-Cola HBC (Greece). It undermines the concept of the FTSE 100 as a UK index, but, following some past governance mishaps, the stock exchange has tightened up on the listing of overseas companies, to the benefit of index performance.

While the FTSE 100 has slumbered, the mid-cap FTSE 250 has done much better. It was launched in 1992, but dated back to the end of 1985, when it was set to equal the FTSE 100. At the end of January 2021 it stood at 20,228, an annual gain of 8.5%, 3.6% ahead of the FTSE 100. As the mid-cap companies move into the FTSE 100, large-cap performance should improve, provided that the promoted companies maintain their momentum. This has been a slow process, more than countered by the stagnation of the mega caps.

From here, the outlook is better. More growth companies are likely to be promoted, there are many more quality companies in the index than before and the drag from the dead-weights will lessen. Continued stagnation of these is not inevitable, as shown by the reinvigoration of AstraZeneca. Others may follow, while the prospects for the banks, the oil majors and the Covid-19 sufferers will surely improve. The recent improvement in the relative return of the FTSE 100 is no fals

Investors sometimes use national stockmarkets as a shorthand for their views about a country, but that doesn’t mean that a given market tells you much about the domestic economy. Take the FTSE 100. It’s the key UK equity index but it’s full of firms that don’t do a huge amount of business in Britain. It’s just a collection of companies that happen to be listed in London. The same is true for many European markets and for regional indices such as MSCI Europe.

That matters because markets get hooked on narratives, and the dominant one today is that the US means growth, while Europe is boring (if cheap). These narratives are hard to dislodge, but over time they can decline in usefulness. This might be the case in Europe, according to a recent report from analysts at Morgan Stanley. They argue that European markets are changing, with new sectors becoming more important.

Bye-bye banks

Some of the highlights really stand out. The biggest sector in Europe? Banks or energy stocks? No – healthcare and especially pharmaceuticals. Technology stocks account for about 8% of the value of the MSCI Europe index, on a par with banks, which have halved in importance since 2010. Energy has also shrunk, to under 5%.

Or if we go by countries, Germany is hugely important – but not the conventional story of engineering giants hooked on China. The largest sector in the MSCI Germany index is technology (16%), with healthcare on 12%. Meanwhile, Denmark and The Netherlands are far more important to the European markets than either Italy or Spain. In fact Denmark has been the best-performing country in Europe over the last decade, driven by healthcare.

Of course, if we look at the current situation, the picture is mixed. On the plus side, the European Union is finally providing more bloc-wide fiscal safety nets, which could make a huge difference in the long term. On the negative side, while Europe seemed to be making a better job of controlling coronavirus until a few weeks ago, that’s now clearly evolving for the worse. Expect more short-term market weakness.

Investing for growth

Still, if you want to invest in the region, there’s an excellent list of first-rate funds. These include the Baillie Gifford European Growth (LSE: BGEU), which is typical of the growth-investing style of this fund house. Top holdings include Prosus (more on which shortly), Zalando (online fashion) and IMCD (speciality chemicals and foodstuffs). BlackRock Greater Europe (LSE: BRGE) has big holdings in popular growth sectors including drugs giant Novo Nordisk, Sika (a specialist chemicals business), publisher Relx and B2B tech giant SAP. I’d also highlight the BlackRock European Dynamic Fund, which has a similar strategy and profile to the investment trust. But my own personal favourite is Montanaro European Smaller Companies Trust (LSE: MTE), which invests in a growth-orientated mix of smaller businesses (disclosure: Merryn Somerset Webb, MoneyWeek’s editor-in-chief, is a non-executive director of this trust).

There’s also my parting thought, Prosus (Amsterdam: PRX). This is a weird beast. It’s the Dutch-listed international assets division of South African media firm Naspers, which is a first-rate venture capitalist that made huge profits investing in Chinese internet giant Tencent many years ago. But it is no one-trick pony: its portfolio of investments is second to none for a business listed on the public markets. You’ve got stakes in everything from familiar names such as Autotrader, Mail.Ru and Delivery Hero through to a very diversified portfolio of newer businesses. The shares trade at a big discount to the portfolio valuation, but you get a really compelling set of businesses across different sectors, all for a very reasonable price.

Tech’s growing clout in Europe

In Europe, the technology sector has surpassed the value of banks for the first time, reports the Financial Times. Ten years ago, tech accounted for just 4% of the MSCI EMU index, compared to 24% for banks, according to Morgan Stanley. Yet low interest rates have weighed on bank profitability, and the sector has tumbled by a third this year. Meanwhile, European tech stocks have advanced 11% in 2020. Hence the Refinitiv Europe technology index is now worth more (€842bn) than the banks (€822bn). A bias towards “legacy” industries such as banks has been a “significant driver” of the European market’s underperformance “over the last decade”, says Morgan Stanley. Yet with tech rising, things are changing on these bourses.

If you want to invest money in the stock market, there are various ways to go about it. You can buy shares in individual companies, but this involves doing lots of research and, ideally, having a solid grasp of how to read and analyse a set of accounts.

Investors who lack the time, knowledge, or inclination to invest in individual companies often use funds instead. This can be anything from using tracker funds or a traditional actively-managed fund. The latter involves you and lots of other investors handing over your money to a fund manager or team of fund managers, who invest your money in a wide range of companies.

The goal of the active manager is usually to “beat the market” – for their fund to deliver a better return than the wider market. For example, a fund manager investing in a basket of London-listed stocks might choose shares with the aim of beating the FTSE 100, the UK’s main stock market index.

There’s just one problem: countless studies have shown that the majority of fund managers fail to beat the wider market consistently over the long run.

This is where tracker funds come in.

What is a tracker fund?

Tracker funds (also known as index funds or passive funds) aim to track the performance of a particular index, such as the FTSE 100 or S&P 500. The funds may hold all, or a representative sample, of the stocks in the underlying index (physical replication), or replicate the performance of the index via buying derivatives (synthetic replication).

The aim is to have as low a tracking difference (the gap between the performance of the index and the fund) as possible. Since the goal of a tracker is to match the index, significant outperformance is as concerning as significant underperformance (even if it might not feel like that to an investor), because it suggests problems with the way the fund is being run.

Tracker funds can be traditional open-ended funds (unit trusts or open-ended investment companies [Oeics]) or exchange-traded funds (ETFs) listed on a stock exchange. Investment trusts are almost never used as tracker funds because – unlike ETFs – they have no mechanism to keep the fund’s share price in line with the value of its assets.

The first tracker open to ordinary investors was the Vanguard Index fund, which launched in the US in 1975. Rivals were sceptical as to whether it would ever succeed, arguing that people wouldn’t be satisfied with merely matching the market, but the concept caught on.

What are the pros and cons of tracker funds?

The big advantage of passive investing is cost: a FTSE 100 tracker fund can have an annual charge of well under 0.1% a year. An actively managed fund could easily charge ten times as much, with no guarantee it will beat the index (most don’t over time). A closet tracker is an active fund that sticks close to its benchmark index to avoid underperforming the market too drastically (and thus losing clients). Investors in a closet tracker are being charged the higher fees of active management in exchange for passive performance, or worse.

The current coronavirus pandemic has seen huge swings in the equity, bond, commodity and currency markets. However, the investment grade Fine Wine market has remained buoyant and steadfastly placid, demonstrating the benefits of a diversified portfolio of investments, particularly into wines from Bordeaux, Champagne and further afield.

Stability in uncertain times

Fine Wine has once again demonstrated resilience to swings in global financial markets in 2020. Since January, the benchmark Liv-ex Fine Wine 100 index has fallen by only 2.5% (partly due to Brexit and ongoing US tariffs on French wine). Over the same period – up until mid-March – the FTSE 100 had fallen by 33%, the Dow Jones Industrial average by 19% and Japan’s Nikkei 225 by 27% (source: Bloomberg, 16/3/2020).

Comparison with Alternative Assets

Fine Wine is a consistently high performer in the annual Knight Frank Wealth Report (which shows Fine Wine market growth of 120% over 10 years), and is often categorised with alternative assets such as art, classic cars, jewellery and property, however, these other assets are highly illiquid. Fine Wine, on the other hand, has a readily identifiable market, the Liv-ex Exchange that allows live trading of the asset and so an exit is possible on a realtime basis. This is particularly true of the more sought-after Investment Grade Fine Wines that would make up a portfolio put together by Noble Rot.

What explains this apparent resistance? There are a number of factors.

Fine Wine has a consistently low correlation to equity markets

Fine Wine has demonstrated a low correlation of between 0.09 and 0.12 (where ‘1’ would indicate that prices move in lockstep, while ‘0’ would represent no correlation at all) to the S&P 500. This points to the diversification benefits of the asset. Meanwhile, the Liv-ex 100 index outperformed almost all other asset classes during the 2008 global financial crisis.

Inverse supply curve drives an increase in value of the investment

Fine Wine performance has shown impressive growth over the medium to long term, with the benchmark Fine Wine 100 index growing by an average of 10.7% per annum over the past 19 years, in the same period that the FTSE 100 fell by 0.4% a year. Fine Wine is generally influenced by two long term economic fundamentals: supply and demand. The finite supplies of the finest wines diminish over time as they are consumed, while investment grade Fine Wine also improves with age, making for an asset that is in greater demand even as it becomes more and more scarce.

A physical asset is widely regarded as a hedge against risk and inflation

Noble Rot clients invest in their own, physical investment grade Fine Wine holdings, stored at Vine International, the gold standard of Fine Wine storage. Physical assets traditionally perform well in periods of economic uncertainty as they act as a ‘store of value’.

A currency hedge

A dip in sterling actually boosts the Fine Wine market: The key Fine Wine indices (the Liv-ex 100 & 1000) are priced in sterling, but the majority of buyers are from China, the US and other major global markets. A weaker pound makes wine cheaper in the local currency of international buyers, which stimulates global demand.

The benefits of diversifying into Fine Wine

More generally, the best investment grade Fine Wines are highly liquid (particularly when compared to other physical assets) as there is a defined exit into an active global market of regularly traded Fine Wine: the Liv-ex Exchange. Wine is considered by HMRC to be a wasting chattel and so is treated as being capital gains tax exempt. Investment grade Fine Wine also displays low price volatility over our recommended holding period of five to ten years opposed to the sometimes extreme volatility seen in financial markets.

Noble Rot’s expertise

With decades’ worth of experience in Fine Wine investment, Noble Rot’s personal and data-led approach ensures that our clients are best-placed to outperform the wider Fine Wine market. For a free, no-obligation consultation to discuss a managed Fine Wine portfolio and/or valuation of your current Fine Wine holdings, please get in touch to find out how Noble Rot can help you add significant robustness and value to your financial assets.

Download a free Fine Wine Investment guide via noblerot.org

Contact us via: info@noblerot.org or +44 (0)20 7316 3036

Markets in Europe hit an intriguing milestone last year.

Exchange-traded funds (ETFs) in Europe now hold more than $1trn worth of assets under management, according to figures from consultancy ETFGI (as reported by the FT).

That represents a doubling in size over the last four years.

A lot of people worry that this is some sort of bubble. Or that it's bad for capital allocation.

Let's have a little think about that this morning, shall we?

Europe starts to catch up on passive funds

Exchange-traded funds (ETFs) are funds that are listed on the stock exchange. Unlike investment trusts, their share price should always (barring things going wrong) directly reflect the value of the underlying investments they own.

ETFs are also passive investment vehicles. All this means is that they track an underlying index. They don't try to beat it. This means that they are a lot cheaper than actively-managed funds, which do generally try to beat a benchmark or the wider market.

The underlying index itself can be just about anything. It could be the FTSE 100 or the S&P 500. If that's the case, the ETF will just replicate the performance of the FTSE or the S&P, less a small annual percentage fee (although in some instances, you can get ETFs that charge nothing at all).

The popularity of these sorts of passive trackers has soared, as more and more investors realise that they can get exposure to their own country's biggest companies at much lower cost than active managers will typically provide. Partly as a result of these lower fees, the passive funds generally deliver better returns too.

However, the index being tracked can also be something much more elaborate. "Factor" ETFs will track indices that are built around investing in stocks that have characteristics that have historically led to better performance. For example, value stocks or momentum stocks or small caps.

Or there are thematic ETFs, which choose a "hot" sector and then launch ETFs to capitalise on it. Current examples include cybersecurity, robotics, and a soon-to-be-launched "medical cannabis and wellness" ETF. These ETFs track indices that track companies which are active within these sectors.

You can see that the distinction between passive (merely tracking an index) and active (picking and choosing investments in order to beat the wider market) investing starts to become quite blurred here.

If you are building an index in order to launch an ETF that invests based on a specific strategy, or a specific sector, then are you all that different to an active manager who uses a value strategy, or who favours tech stocks or Chinese stocks?

To an outsider with no interest in defending one side or the other, you could argue that the only difference between the ETF and the active manager is that the ETF's strategy is more transparent, and you remove the discretionary human element which in the vast majority of academic literature, generally causes more trouble than it's worth.

Passive funds won't cause the next crash

This is why I find a lot of the criticisms of passive funds to be rather too lazy for my liking.

Lots of people not all of them with vested interests in the active management industry worry that passive funds are in some way creating or contributing to a bubble in valuations.

I don't necessarily think that this is wrong. But this is not a black and white issue. You can believe a number of things simultaneously. For example, the rise of passive funds, in combination with a never-ending, central-bank-underwritten bull market, may well be distorting capital flows in some subtle or not-so-subtle manner.

There is also the ever-so-slightly more niche risk that certain passive funds may be creating an illusion of liquidity where there is none in much the same way as the highly actively-managed Neil Woodford funds blew up last year.

But none of these potential problems makes passive funds in and of themselves, "bad" things. If investors weren't using passive funds to access the market, they'd still be buying it, probably using the same active funds that they've been pulling out of. People buy what's going up that's the way this stuff works. Passive funds and ETFs are simply a new way to do that.

As for the liquidity issue liquidity is something you must pay attention to when investing, and there's no doubt in my mind that come the next market crash (whether it's ten months or ten years from now), we will see certain ETFs or pockets of ETFs blow up or struggle to cope.

However, the same will apply to actively-managed funds. Any financial vehicle that offers its investors more liquidity than actually exists in the underlying market in which it invests is setting itself up for trouble in the future. As Woodford who I will note again, was an active manager, Britain's most famous one at that amply demonstrated last year.

In short, passive funds are just an evolution of financial markets. Will they be involved in the next crash? Of course. They're now a fundamental part of the market. But will they be the cause of the next crash? No.

And in the meantime, as long as you understand what the ETF or passive fund that you buy is actually investing in, then most of the time, you'll find that they are cheaper and preferable to the active alternative.

That's the point of evolution to improve things. Sometimes that happens even in financial markets.

The FTSE 250 had its best day in nine years at the close of last week. News of "positive" discussions between Boris Johnson and Irish counterpart Leo Varadkar revived hopes of a last-minute Brexit deal.

The index, which contains medium-sized firms, surged by 4.2% last Friday. Sterling served up its best two-day performance in a decade, although that only took it back to where it was when Johnson entered Downing Street this summer.

Dublin's stockmarket leapt 3.38% on the news, adds Gurpreet Narwan in The Times. The FTSE 100 index rose a more modest 0.8%. That is because not all of the UK's largest companies would gain from a deal, says Bloomberg. A withdrawal agreement would trigger a big leap in the pound, which would weigh on the profits of businesses that make 70% of their sales overseas. Morgan Stanley analysts have noted that British pharmaceutical giants and some consumer goods exporters would actually take a short-term hit in the event of a deal. On the other hand, more domestically focused businesses, such as "beaten-down banks, housebuilders and retailers" would rise. The FTSE 250 companies make only half of their sales abroad.

Of course, as Ranko Berich of Monex Europe tells Philip Georgiadis in the Financial Times, "sterling is only ever as good as the latest headline".

Yet whatever wild turn the Brexit drama takes next, the important thing to remember is that UK stocks are trading at bargain-basement prices.

With the FTSE 100 currently yielding about 4.5% and the FTSE 250 just over 3%, the London bourse offers some of the most generous dividend yields of any major market.

Current valuations suggest that investors willing to buy and hold for the long-term at these levels should enjoy good returns.

A few short years ago, Neil Woodford was one of the brightest stars in Britain's investment firmament. He built his reputation at investment manager Invesco Perpetual from 1988 to 2014. His big triumphs were to avoid the two big bubbles of the 2000s tech and banking and to buy detested, but hugely undervalued tobacco stocks instead. His main fund, Invesco Perpetual High Income, returned more than 13% a year, trouncing the FTSE All Share's annual average of 9%.

This success made him one of the vanishingly few British fund managers with brand name recognition. So when he upped and left Invesco to set up on his own heavily backed by Britain's biggest broker, Hargreaves Lansdown plenty of private investors went with him.

Woodford's new flagship Equity Income fund was nothing like a traditional income fund. Instead of blue-chip dividend-payers, the fund owned chunky stakes in mid-cap stocks with high yields to provide the income, with the rest made up of small caps and a clutch of unlisted companies or what the uncharitable might describe as hopeful punts on lottery ticket stocks.

In the two years after launch in June 2014, the fund beat the FTSE All Share index. By May 2017, its assets under management had peaked at above £10bn. By then, however, the halo was slipping. High-profile profit warnings from holdings such as doorstep lender Provident Financial and motoring group AA battered investor confidence. As the money started to flow out, the fund's exposure to small caps and unlisted equities became a real problem.

Woodford Equity Income was an open-ended fund, so when investors withdrew, assets had to be sold to fund these redemptions and the most liquid were the first to go. As a result, illiquid assets became an ever-bigger percentage of the portfolio, until it was in danger of breaching regulatory limits. And better-informed investors were very aware of this. As a result, the downward spiral exacerbated by Woodford's desperate efforts to make the portfolio look more liquid than it was accelerated, until in June this year, the fund was closed to withdrawals.

What went wrong? In short, Woodford believed his own hype. Rather than stick to betting on long-term trends using big, liquid blue chips, he decided that his genius was transferable to the world of picking winners from among very early stage companies. That was an early red flag for investors swapping investment styles often precedes a fall for a manager. Indeed, even before Woodford struck out on his own, wealth manager St James's Place had commissioned research for its own internal use that found no sign that he had any ability to add value through his investments in early-stage companies.

Meanwhile, cut loose from the compliance structures of a big fund management group, Woodford failed to pay attention to the basics and because he was the man with his name above the door, no one was there to tell him "no". A combination of greed and ego led him to run a fund that was simply too big to invest safely in so many small companies without causing predictable problems when it came to sell.

For the same reasons, the fund was structured in an entirely unsuitable manner. As anyone who owned open-ended commercial property funds in the wake of the 2016 Brexit vote learned to their cost, it is a huge mistake to own illiquid assets in a fund that promises daily liquidity. This is what investment trusts (closed-ended funds) are for. Indeed, while Woodford's Patient Capital Trust has also been a catastrophic investment, those who bought it have at least been able to get their money out as and when they desired.

In all, it's a classic investment tale of hubris meeting nemesis. But don't feel too sorry for Woodford. His reputation might be in tatters, but he is still sitting on the fortune he made. Unfortunately, his investors are unlikely to be so lucky.

First published in The Times

Investors often wish they had a time machine. Seekers of reliable dividend income in Britain would have been quids in if they had scooped up shares in three British investment trusts in the late 1960s. The City of London Investment Trust, the Bankers Investment Trust and the Alliance Trust are the only three in the UK to have increased their dividend payouts every year for more than half a century. But where should investors be looking for this sort of performance now?

An encouraging backdrop for income

Although we've been mired in an era of low growth and low interest rates for years, the overall outlook for income investors seems encouraging for now. The yield on the FTSE All-Share Index is around 4.8% about the highest it has been since the financial crisis. Job Curtis, manager of the City of London Investment Trust, is optimistic about the level of income being generated from the UK equity market.

"We are seeing mid single-digit figure growth in dividends... so overall, the equity market is not a bad place to look." The main drivers of this growth recently have been British American Tobacco, as well as the banking and mining sectors. And with 70% of UK-listed company sales coming from overseas, this yield should be able to weather domestic turmoil.

But choose your stocks carefully. Companies making large payouts to the detriment of capital growth may find it becomes unsustainable, as Ben Lofthouse, manager of the Henderson International Income Trust, told The Times last week.

"If you get caught in a dividend trap, you might find the income you hoped for has no prospect of sustainable growth. This eliminates one of the main advantages of investing in equities. Dividend growth not only protects investors from inflation, it drives share prices higher over the long term, meaning investors can benefit from capital gains."

In a recent example of a promised dividend which failed to deliver, last month telecoms giant Vodafone cut its dividend by 40%, having told investors in November that it would maintain it for the financial year. Unfortunately, the high cost of investing in 5G technology thwarted this optimism. Before the dividend cut it had been yielding 9.3%.

Investors are keeping an eye on BT Group, which will also be thinking about the cost of 5G technology. The dividends of utilities SSE, Centrica and National Grid also appear shaky. Given the uncertainty surrounding dividend payouts at several individual companies, it's no wonder investment trusts with long records of increasing dividends are so popular.

Why investment trusts?

A unique characteristic that explains the appeal of investment trusts to income investors is managers' ability to hold back up to 15% of their gross annual income as revenue reserves. Managers can therefore build up a "rainy day fund" they top up in good years and draw upon in difficult ones years.

This enables them to smooth out dividend payments, rather than axing them completely one year and reinstating them when markets have improved. This suits investors who are looking for a steady and reliable income.

However, there is another way that managers can juggle things so as to keep dividends on an even keel. As of 2012, investment trusts have been allowed to dip into their capital (as well as the income they make from their holdings) to top up or completely fund their dividend payouts, as long as shareholders agree.

This means that when they sell holdings, they can direct some of the profits to their dividend payouts, rather than just putting that capital to use in the future to buy new holdings. More than 20 funds have now changed their dividend policy to allow for this tactic, and this number is likely to go up in future. Private-equity funds are especially inclined to use this approach: they tend to invest in early-stage companies which do not yet pay dividends.

Is this a bad thing?

Not necessarily. Investors want income. These investment trusts are providing them with regular, reliable dividends. "However, we believe the jury is still out on the success of this strategy," says Sam Murphy of broker Numis. "In our view, boards of investment trusts need to consider whether an enhanced yield is sustainable over the long term."

Indeed, the approach has not yet been tested during a market downturn. When markets are going up, as they have been doing for the past few years, the occasional raiding of a trust's capital account might not be especially noticeable. But the practice would be "dangerous" during a bear market, says Curtis. If the market is down 10% and the manager then takes 1% out of the capital account, people will start taking note. "That is when the managers might start getting angry letters from shareholders."

Murphy gives the example of European Assets investment trust. The fund had been popular with individual investors, partly because of its high yield, which is funded largely through a distribution from capital. Helped by rising markets, it had grown its dividend over the past few years.

However, a 22% cut in the dividend for 2019, as a result of falling equity markets, shows that investors relying on funds paying dividends from capital are "likely to face greater income volatility than from traditional equity income funds that pay covered dividends supported by revenue reserves".

Discount control

With demand for income showing no signs of abating, broker Winterflood believes that more funds will consider paying so-called "enhanced dividends", particularly those trading on wide discounts. Indeed, some fund managers have taken advantage of their ability to convert capital into income in order to alleviate their discount, with five funds adopting this strategy in 2018 alone. Generally, shares in an investment trust trade at a discount to the value of the fund's underlying assets (net asset value, or NAV) when investors don't think those assets are worth paying full value for. If the discount gets too wide, this can make the trust look unappealing to outside investors. However, if the trust maintains a stellar dividend record this may make people change their minds about buying in, therefore boosting the trust's share price and narrowing the discount.

This is good for those who have already invested, as they benefit from the capital growth. Examples of funds which have taken this approach include JPMorgan Global Growth & Income, Securities Trust of Scotland, JPMorgan Asian, BlackRock Latin American, JPMorgan Japanese Smaller Companies and International Biotechnology, as well as several private-equity funds.

"There is some evidence than an enhanced yield broadens the potential investor universe," admits Murphy. "However, simply adding a yield to a fund with a poor track record, or in an asset class that is out of favour, is unlikely to turn around investor sentiment."

For instance, asset manager JPMorgan has seen its Global Growth & Income re-rated following the adoption of an enhanced income policy, and it is now trading on a premium, notes Winterflood. However, its Asian fund, which operates in a sector that has fallen out of favour for now, remains on an 11% discount, despite a 4.5% yield and a superior performance record to Asian Income funds such as Schroder Oriental Income or HendersonFar East Income.

Winterflood takes a more relaxed view of the practice than some, and believes that paying so-called "enhanced dividends" is merely one of the advantages of the investment trust structure. There's also the argument that in being able to dip into capital, managers can avoid turning to riskier high-yielding companies merely to maintain their dividend.

The key issue here, though, is whether or not investors are actually aware of where their income is coming from. Many investors might not realise that this is what their fund manager is doing. Unless they're very interested in the inner workings of how a trust is run, it's unlikely that this subject will come up on most people's radar. And although the strategy is only permitted subject to shareholder approval, it is news to no one that many shareholders don't bother to participate in such votes, or have their vote cast by a nominee, their broker.

Charging fees to the capital account

One final thing to be aware of when looking at an investment trust's dividend history is that managers can take a proportion of fees and finance costs out of the capital account. This leaves the money in the revenue account to be used to pay dividends, but comes at the cost of the capital account. The practice is more prevalent in equity income funds than in those that strive to maintain capital growth and are therefore are under less pressure to increase their dividend. Most equity trusts charge 60% to 70% of management fees and finance costs to capital, analysts from Numis noted in 2017. If all fees and finance charges were instead charged to revenue, the average yields for UK equity income investment trusts would, in all likelihood, fall. So it's useful for investors to be able to see exactly how their capital gains are drawn on by managers.

If you're concerned about the reliability of the income from an investment trust, there are several things you can do to get a clearer idea of how things stand. First, go to the annual accounts, which you can find in the investor relations section of any trust's website. Look back over five or ten years to get an idea of whether the managers have been able to maintain or grow their dividend.

Then, look at their revenue reserve fund, the "rainy day" fund where they keep revenue back. If the revenue reserve cover figure is more than one it means that they can cover the dividend for one year should the holdings earn nothing at all. If it's less than one, they would not be able to fully cover the dividend in such a scenario. Within the UK Equity Income investment company peer group, the average revenue reserve cover figure is 0.76.

Next, look at the trust's dividend cover. Different to the revenue reserve figure, this shows the trust's annual earnings, relative to the dividend it pays. So it should give you an idea of just how capable the trust is of funding the planned dividend with the amount it's currently earning. This figure will either be expressed as a percentage, so would be more than 100% if the trust is earning more than enough to cover its dividend, or as a multiple, so if a trust has dividend cover of 0.5, it is only earning half the amount necessary to pay the dividend. In this situation, investors could take the cover figure as a sign that the dividend is not very sustainable.

A shortcut

If you go to the website of the Association of Investment Companies (AIC), you can easily look up a trust's dividend history and revenue reserve cover figures, as well as how the dividend is funded. This is especially handy for those who can't quite face trawling through page after page of funds' accounts (though that can be a good way of familiarising yourself with the nuts and bolts of your investment). Investors should also keep in mind that just because an investment trust has a long history of increasing its dividend payments, it doesn't mean you should automatically buy it.For example, Perpetual Income & Growth is the newest entrant to the AIC's list of funds which have increased their dividend every year for 20 consecutive years. It is currently trading at a fairly significant 12.4% discount to NAV, which is probably explained by the fact that it has had a fairly dismal past few years, having suffered setbacks with several portfolio companies, including doorstep lender Provident Financial and outsourcer Capital.

The trust's NAV has gone up by 7.8% over three years, compared with 33.3% for the FTSE All Share. Yet it has been able to increase its dividend payments for 20 consecutive years. It has revenue reserves of £30m, enough to cover ten months of future dividends, and has been granted permission to dip into capital in order to pay dividends, but has not yet taken advantage of this. It remains to be seen whether manager Mark Burnett can reverse the portfolio's fortunes in terms of capital growth. For now, the poor performance of the portfolio undermines the trust's appeal, the steady income increases notwithstanding.

Similarly, just because a trust has drawn on its capital reserves to pay dividends doesn't necessarily mean you should avoid it. Some well-established and popular trusts have done so, including MoneyWeek favourite the Scottish Mortgage Trust. Below, we look at some investment trusts which have a proven dividend record and appear well placed to continue providing investors with income.

Today's investment trust dividend heroes

On the AIC's list of "dividend heroes" there are three trusts with 51-year records: City of London, Bankers Investment Trust and Alliance Trust. Caledonia Investments is not far behind, on 50, with F&C Global Smaller Companies and Foreign & Colonial Investment Trust both on 47.

Of the three trusts with 51-year records, UK-focused City of London (LSE: CTY) has the highest yield, with a current figure of 4.52%. It is trading at a 2% premium to net asset value (NAV), and has an ongoing charge figure of 0.41%. City has a revenue reserve cover of 0.76 and dividend cover of 106%. If you're looking for a globally diversified alternative, Bankers Investment Trust (LSE: BNKR) is currently yielding 2.2%. It is trading at a 1.2% discount to its NAV, with revenue reserve cover of 1.75 and dividend cover of 83%. Caledonia Investments(LSE: CLDN) sits within MoneyWeek's portfolio of investment trusts. It is trading at an 18% discount to NAV, has dividend cover of 1.01 and an impressive revenue reserve cover of 8.72. Note, though, that it is more focused on wealth preservation than dividend growth.

Numis highlights JPMorgan Claverhouse (LSE: JCH), which invests in UK-listed blue chips such as Royal Dutch Shell, BP and GlaxoSmithKline. It pays a fully covered dividend, and has built up revenue reserves equivalent to 1.18 years' dividends, the highest of its peer group. Finally, research group Kepler has devised a top-20 list of trusts for those looking for income and growth, made up of funds that have "generated sound solid returns while delivering a high and rising income to investors". To make the list, funds must yield 3% and have grown their dividend by 3% on average over the past five years. Top of the list is JPMorgan European Income (LSE: JETI), which yields 4.4%. The fund screens the top 30% of the MSCI Europe ex-UK Index by yield and then avoids firms whose dividends could be threatened. Next is Schroder Oriental Income (LSE: SOI). It invests across Asia Pacific and yields 4.2%.

Updated October 2019

At MoneyWeek, we are big fans of value investing buying stocks, sectors or even entire markets when they are cheap, as indicated by key ratios such as price/earnings (p/e) or dividend yield. But when it comes to timing a decision to buy or sell, momentum' indicators can also be useful. One such popular measure, highlighted by Big Picture blogger Barry Ritholtz, is the relative strength indicator (RSI).

What is the RSI?

The RSI calculation is fiddly, but you don't need to do it yourself any good charting package will do it for you. However, it is worth understanding how it is put together, so that you know what you're using. The basic calculation is: 100 (100/(1+RS)). RS represents the average gain over a selected number of trading periods, divided by the average loss over those periods.

Here's a simplified example. Let's say that over a given period the FTSE 100 gains an average of 50 points per winning session, and loses an average of 20 points per losing session. The RSI is 100 (100/(1+50/20)), which is 71.

The closer to 100 the reading is, the more overbought the index is. The closer to 0, the more oversold. Measured over a number of sessions (to smooth out the data), an RSI over 70 puts you in overbought territory and a reading below 30 is oversold, according to J Welles Wilder, who came up with the measure in the 1970s.

As with all measures, there are some pitfalls to be aware of. One is the number of trading periods used to measure average gains and losses Wilder recommended at least 14. As a rule, the more sessions you use, the greater the smoothing effect and the less likely the RSI is to hit overbought and oversold levels.

So, the more volatile the share or index, the further you should extend the calculation, to avoid constant buy' and sell' signals that could have you wipe out most of your trading gains in trading costs.

More and more investors are using exchange-traded funds (ETFs) to get low-cost access to various themes and markets. However, I suspect many more would like to use them but are confused by the wide range of choice out there.

It's one thing to track the FTSE 100 or the S&P 500, but once we head away from well-known benchmarks like these, most of us don't really understand the pros and cons of specific indices. So every month or so I plan to outline a shortlist of solid ETFs to choose from, all focused on one particular asset class or theme. I'll concentrate on the biggest, most liquid, and best-value ETFs in each case.

Practically risk-free options

This is where bond funds investing in highly rated, mostly sovereign, investment-grade bonds usually with a short maturity profile come in. By keeping the maturity of the bonds to a few years maximum, you can minimise interest-rate risk (longer maturity corporate bonds might pay out a juicier yield, but total returns are much more vulnerable if rates rise sharply). There is lots of competition in ETFs in this sector.

For instance, Invesco recently announced it is launching the lowest-cost US Treasury Bond ETFs in Europe. Investors can choose to focus on US government bonds with maturities of between one and threeyears; three and seven years; or seven and ten years. Alternatively, they can get broad exposure across the full maturity spectrum.

The four funds will be available to trade in US dollars or pounds on the London Stock Exchange and charge just 0.06% a year. A sterling-hedged version of the Invesco US Treasury Bond 7-10 Year ETF (LSE: TRXS), which would help to protect against exchange-rate fluctuations, is also available at an ongoing charge of 0.1% a year.

US government bonds may well represent great value, with bountiful yields compared with other developed-world government debt. The yieldon the benchmark ten-yearUS Treasury bond index has more than doubled from its lows in mid-2016.

Yet I suspect this yield probably won't head much higher from here, and that in fact after a year ortwo yields might start to fall again as US growth slows and the US central bank (the Federal Reserve) starts to cut rates again.The big challenge fora sterling investor is the exchange rate, which is why the hedged, longer-dated ETF offered by Invesco might be worth investigating.

More established ETFs

total expense ratios (TER)

The first ETF, the German bond fund, is a slightly left-field candidate, but if there is a financial panic, I'd expect European bond investors to opt for the safest haven close by which will be German government bonds (or bunds).

Next comes an ETF from Vanguard, which tracks a broad selection of UK gilts and has an average yield to maturity of just 1.5%, but a total cost of ownership of just 0.12%. Gilts are a relatively safe way to stash away some cash earmarked for investing. However, longer-maturity gilts might be vulnerable in a sterling sell off, so it's worth noting that the Vanguard fund holds more than 50% of its portfolio in gilts with a maturity of more than ten years.

Index-linked gilts focus on inflation protection. This is where the third ETF on the list an iShares fund comes in. It is one of the biggest,most liquid funds in thissector, although the yield isnext to nothing.

The fourth ETF is the iShares Ultra Short Term ETF, which is very low cost and sterling denominated. I really like this fund because it is diversified between corporate and government issuers,but more than 85% of its holdings are in bonds due to mature inside two years.The average yield to maturityis 1.42%.

For those worried about the possibility of Jeremy Corbyn being elected which could prompt massive selling of gilts my alternative favourite, and the last fund on the list, is PIMCO's US Dollar Short Maturity fund, which has a higher TER of 0.35%.It's an actively managed ETF that invests primarily inshort-duration, dollar-denominated bonds across countries and issuers (government and corporate).This is a big beast of a fund, with nearly $2.4 bn under management. Around 69% of that is invested in investment-grade corporate bonds, and all but 6% is in bonds with a maturity of less than a year. The estimated yield to maturity is 3.35%, but remember that you are vulnerable to fluctuations in the sterling-dollar exchange rate.

UK stocks are paying higher dividend yields than at any point since the financial crisis. Should you buy in?

There are lots of reasons to be nervy about investing in the UK right now. The ever-shifting nature of Brexit is one issue; the potential for a Jeremy Corbyn government and the policies that might accompany it are another not entirely unconnected factor. But there's an argument to suggest that a lot of this uncertainty is being priced in just now.

The overall dividend yield on the FTSE All-Share index, at around 4.5%, is now floating around its highest level since the financial crisis. The big question, of course, is will these dividends be paid?One measure to look at is dividend cover (see below). Cover for FTSE 100 stocks has improved in recent years, notes Laurence Fletcher in the Financial Times, but it's "still well below its long-term average".

FTSE 100 companies currently pay out an average of 58% of income versus the long-term average of 50%. But while there's no doubt that some stocks are at risk of cuts (phone group Dixons Carphone cut its dividend by 40% this week, for example), it's hard not to be tempted at this level, particularly as high, or at least decent, yields are not limited to any one sector.

Should you feel confident enough, you can go for individual stocks. For those who have no desire to stock pick, there are plenty of funds to look at. On the passive side, you could buy a FTSE index tracker or exchange-traded fund (ETF) with very low fees.

If you want a tracker, the HSBC FTSE All-Share fund charges 0.04% while the iShares Core FTSE 100 ETF (LSE: ISF/CUKX) the former ticker pays out dividends, the latter reinvests them has an ongoing charge of just 0.07%. Both yield more than 4%.

Other options to consider are passive strategies that focus purely on dividends. The SPDR UK Dividend Aristocrats (LSE: UKDV) focuses on the 40 highest-yielding UK stocks that have raised or held their dividend for at least seven years in a row.

Top holdings include telecoms group BT and retailer Marks & Spencer. It yields 4.6%.The iShares UK Dividend (LSE: IUKD) follows the FTSE UK Dividend+ index, which tracks the highest-yielding 50 stocks in the FTSE 350, and yields 6.6% (which does hint at the risk that some of those holdings may not pay up). The Vanguard FTSE UK Equity Income fund tracks the FTSE UK Equity Income index. It avoids holding more than 25% of its value in one sector and currently yields around 5.7%.

On the active side, investment trusts offering high yields include the Henderson High Income trust (LSE: HHI) on 5.9% and Dunedin Income Growth (LSE: DIG) on 5.6%. Both invest mainly in UK-listed blue chips. Another interesting option is Shires Income (LSE: SHRS), which owns several preference shares and yields 5.6%.

I wish I knew what dividend cover was, but I'm too embarrassed to ask

Companies pay dividends to shareholders out of their profits. A dividend is entirely discretionary unlike the interest payment on a bond, it doesn't have to be paid and it can be cut or even scrapped altogether if deemed necessary. Directors decide what proportion of profits they will distribute: the amount varies depending on how well the company has done (ie, on how much the directors feel it can afford to pay out), but also on other, less tangible, factors.

For example, directors tend not to be keen on cutting dividends because the market reaction is typically bad. Also, fast-growing firms tend to pay out a lower percentage of their profits than more mature firms, because they prefer to invest all or most of their profits in opportunities for future growth.

If a company's dividend yield (the dividend per share expressed as a percentageof the share price) looks particularly high, then that can be a warning sign. For example, if a company is paying a dividend of 10p a share, and the share price is £1, that's a yield of 10%. If the average for the index or sector is much lower than that, then it suggests investors are highly sceptical that the dividend will end up being paid.

So when assessing the financial health of a company, it's worth looking at dividend cover as a guide of how likely it is that the dividend will remain stable or rise in the future. Dividend cover simply measures how many times over the dividend payout is covered by the profits available to pay for it.

To take a very simple example: a firm that makes £20m in profit and allocates £2m for dividends has a cover of ten, while a firm that makes £50m but pays out £25m in dividends has a cover of two. The higher the dividend cover is, the more sustainable the payout. The "payout ratio" is simple the inverse of the dividend cover ratio so in this example, the first company has a payout ratio of 10%, while the second is on 50%.

Royal Mail has been demoted from the FTSE 100 in the latest quarterly review. How is the decision made?

This week saw the results of the quarterly FTSE 100 reshuffle. Struggling postal service Royal Mail will fall out of the index on 19 December, and Lloyds insurer Hiscox will join. If you're not familiar with the mechanics of indices, this might all seem baffling. So how does the reshuffle work? And can investors do anything with this information?

The FTSE 100 comprises the biggest 100 UK-listed companies by market capitalisation (market cap see below). The FTSE 250 (often known as the mid-cap index) is made up of the next 250 stocks (the 101st to 350th stock exchange members, ranked by market cap). The FTSE 350 combines the two. Of course, shares trade every day and market caps go up and down. So at any given point, the biggest stocks in the FTSE 250 might well be larger than the smallest in the FTSE 100.

Each quarter, index provider FTSE Russell reviews each index to see if any members should be relegated or promoted. For a company to enter the FTSE 100 at a reshuffle, it has to have a market cap that puts it in the top 90 by size. Similarly, once in the FTSE 100, a stock has to fall quite far to be relegated it has to have a market cap below that of the 110th biggest company in the UK stockmarket.

This prevents stocks from constantly dipping in and out of either index at each reshuffle, but there are usually at least a few changes in fact, the review prior to this week's (the September reshuffle) was the first in 12 years that resulted in no changes being made.

So what, if anything, can an investor make of these moves? As Tom Stevenson notes in The Daily Telegraph, a study by Smith's Corporate Advisory shows that, on average, stocks heading for relegation lost nearly 19% in the two months prior to the announcement date. Similarly, companies that made it to the FTSE 100 enjoyed average gains of more than 15% in the run-up to the news, then another 2% up to the actual joining date. This is partly down to funds that track the FTSE 100 having to sell or buy stocks that leave or join.

But that's no help to those hoping to make an "arbitrage" trade after all, this movement mostly happens prior to the review. And once a stock has joined its new index, its performance shifts new FTSE 100 entrants typically lost 5% in the two months after joining, while those relegated to the FTSE 250 were flat. In reality, says Stevenson, the quarterly reviews are pretty predictable by the time the results are out, they have been priced in.

In short, while reshuffles are useful to be aware of, and might provide buying or selling opportunities for stocks that are already on your watchlist or in your portfolio, they're not a feature to build a strategy on.

I wish I knew what market capitalisation was, but I'm too embarrassed to ask

Market capitalisation, often abbreviated to market cap, is the total value of all outstanding shares in a company. To get the market cap, you simply multiply the number of outstanding shares by their price. For example, there are currently just under 20 billion BP shares in issue, with a price of around 530p each, giving the oil giant a market cap of £104bn.

The largest listed firm in the world is technology group Apple. In August this year, it became the first-ever company to boast a market cap of more than $1trn. Since then, its share price has fallen sharply, and it currently has a market cap of around $860bn, which has left it vying with old rival Microsoft for pole position.

Companies are often divided into "nano cap", "micro cap", "small cap", "medium cap" and "large cap", depending on size, although there is no official definition of the specific parameters of these categories. In the UK, the FTSE 100 is usually referred to as the large-cap index, and the FTSE 250 as the mid-cap. Most major stockmarket indices (though not all the Dow Jones and the Nikkei 225 are notable exceptions) are weighted by market cap, whereby changes in the value of the firms with the highest market caps will move the index more than changes in the smaller stocks.

On its own, market cap doesn't tell you much, other than what it would cost you to buy all of a company's issued equity at current prices. If you divide market cap by annual earnings, you get the price/earnings (p/e) ratio (also calculated by dividing the share price by earnings per share). You can compare this with the p/e of the sector to get an idea of how expensive or cheap a company is.

But this doesn't take account of outstanding debt, preferred stock, or cash held. So analysts often use "enterprise value" (EV) instead. This gives a fuller measure of what a firm is worth and also allows the comparison of stocks with different funding structures.