Integrated oil and utilities sectors still offer dividend opportunities

With the abandonment of cash dividends by almost all UK listed banks and FTSE All-Share dividend likely to fall by at least 10% as a whole in 2009, Michael Clark, manager of the Fidelity Income Plus fund, discusses where income investors can now find yield.

"The suspension of dividend payments from UK banks, coupled with the dividend cuts made in the construction-related and house building sectors means that investors searching for yield will need to pick their stocks carefully in the coming months.

"There are over-indebted companies in all sectors and my focus will be on the security and visibility of dividend yield - virtually to the exclusion of all other considerations.

"Analysis we have undertaken at Fidelity suggests that dividends in 2009 are secure in integrated oil companies, pharma, most telecoms and food stocks. In utilities many companies should even be able to deliver growth of up to 8%. The emphasis throughout my fund is on cash generative businesses able to fund their dividends even in tough times.

"It seems clear that we are now entering a recession that could last some time. However, share prices will recover long before the economy gets back on its feet and I am looking at a number of quality companies which are very oversold and could recover during the coming year. A number of these could come from the media and retail sectors.

"But for now the main investments in the fund are in the sectors where dividends are secure and growing. A good example of this is BP, the largest position within the fund. BP has just delivered a 25% increase in its quarterly dividend in dollar terms, which translates into over 60% in sterling terms. Even with the fall in the oil price, I see good dividend growth from companies like this going forward."

Michael Clark assumed responsibility for the FIF Income Plus Fund on 1st July this year. Michael has 20 years experience of investment research. Prior to joining Fidelity five years ago, he was an equity analyst at JP Morgan, Enskilda and Morgan Grenfell. He has covered numerous sectors from a Pan-European perspective, including construction, oil services and house-builders. Among Michael's buy criteria for companies include evidence of strong cash flow, rising dividend yields, attractive valuations and healthy balance sheets.