Is dividend yield a buying signal? Asks Fidelity’s Morse

On Thursday this week the yield on UK shares hit 4.6%, exceeding the yield on 10-year Government bonds at 4.4% for the first time in five years.

The last time that such a "cross-over" occurred was in March 2003 and it marked the low of the bear market in UK stocks during the first half of this decade.

However, Sam Morse, manager of the Fidelity MoneyBuilder Growth Fund, says investors should be cautious about interpreting the cross-over as a buy signal. He says: "The current level of dividend yield appears to be very attractive versus gilts but this is no guarantee that we have reached the market low. In March 2003 the dividend yield also rose above the bank base rate so with rates at 5% we are not quite there yet."

Sam also reminds investors that that in 1974 the market experienced many false rallies, followed by major lurches downward. "When the bounce did come in 1975, the market virtually doubled in a few months. I think we could be in the last phase of this bear market. My advice is to stay fully invested and reinvest your dividends."

Sam Morse, who has been managing investments for 15 years, adopts an approach to UK equity investment based on dividend growth. The Fidelity MoneyBuilder Growth Fund is a top-quartile performer in the UK All Companies Sector year-to-date, over 1, 3, 5, 10 years and since launch.