LONDON, Sept 25: When a stock market has been falling for nearly three years, war is on the horizon and interest rates are at 38-year lows the best policy is to throw in the towel and put your money under the mattress, right?

Not according to some market watchers, who say there are ways to make money out of Britain’s FTSE 100 index as it languishes at six year lows.

They advise investors to hunt out stocks which have attractive dividend yields, strong balance sheets and dependable businesses as a way to gain better returns than hoarding cash in a bank account.

London’s near three-year bear market, lasting since the FTSE 100 hit a high of 6,950 on the last trading day of 1999, has hacked into shares prices, but in the process has pumped up dividend yields in many stocks — meaning investors have to lay out less to get the same level of payout.

A number of household names are sporting yields well above four per cent bank rates, including bank group Lloyds TSB on 7.4 per cent, utility Scottish Power on 7.8 per cent and cigarette maker British American Tobacco on 4.7 per cent, proving value still exists in a market which has not scored an annual gain in the current millennium.

Granted, this could signal an expectation that dividends may be cut.

Yet market watchers such as Andrew Bell, European Equity Strategist at brokerage Carr Sheppards Crosthwaite, say the market’s fall has thrown up yield permutations not seen for decades.

There isn’t a table that tells you when to sell at the top or when to buy at the bottom, all you can do is perhaps look at some benchmarks for value and say at 3,500 on the FTSE your net dividend yield is going to cross over with cash, he said.

At Tuesday’s 3,671-point close the FTSE 100 yielded 3.8 per cent, below bank rates, but with tax allowances still giving private investors a better return than on cash.

A little bit lower than that it’s going to cross over with government bonds and that’s a valuation level that you haven’t seen since the 1960s, Bell added.

The rules are fairly simple. Pick a company that has not overstretched itself with debt, has a dependable, predictable business and strong management.

If you’re buying what you believe are secure yields in well-managed businesses, the chances are pretty good that on a three to five year view, barring huge disaster, you’re going to make good money out of it, said Bell.

For John Smith, senior fund manager at Brown Shipley Investment Managers, dividend cover — the number of times a company can divide its earnings by the dividend — is also an important factor as a company paying out all its earnings in dividends is leaving itself little room for manoeuvre.

Mark Tinker, global head of debt and equity strategy at Commerzbank, said investors needed to be prepared for the long haul, ready to countenance falling share prices in the short term.

For some the calculations need careful scrutiny, especially in a market which remains on edge about stagnant economies and corporate earnings warnings and which some see falling below 3,500 points on the FTSE before it can advance.

The job we have as investors is can we find stocks on comfortable yields like 4-1/2 per cent with a scope for increases? We know that when the market rally comes those companies have the scope to really motor upwards and we’re being paid something while we’re waiting, said Smith at Brown Shipley.

There is justification that the high yield in the market will underpin the market but what I’m worried about is that if this recessionary environment grows, there are going to be a lot of dividend cuts in the next 12 months, he said.—Reuters