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Free Example of "Low Bond Yields Drive Move to Dividends" Essay

This essay gives an overview of the recently published article in Financial Times by David Oakley “Low bond yields drive move to dividends”.

The article addresses the issue of changing investors’ interests from government bonds to companies’ shares. The reason for the ongoing shift is extremely low, even sometimes negative, bond yields. On contrast, purchasing stock of highly rated companies with relatively good yields may offer a substantial income flow for smart investors.

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The article provides the examples of successful equity income funds, as Murrai International Trust that has high dividend yields, increased demand for their shares and, consequently, issued the greater number of shares than ever. British American Tobacco, one of its biggest stock holdings with high investment rates, offers an equity yield of 4,1 % whereas five-year corporate bond yield is only 1,2%. BASF offers a 4% dividend yield and a 1,21 % yield for bonds. Even more striking are the numbers of Royal Dutch Shell who offer a 4,7% dividend yield comparing to 1,08% yield on five-year bonds.

The author of the article provides two negative sides of the latest changes in investment priorities. Primarily, low bond yields create financial problems for pension funds and insurance groups that need income payments to meet their liabilities such as providing pension payments for retirees. Another worrying moment is that shares are considered to be risk assets and in case of economy downfall and deflation, investors may face tremendous losses.

The article discusses serious questions of the cautious and efficient investment decisions. The higher valuation for the corporate equity may well be a sign of overvalued stock and a subsequent downfall in dividends yields. Nonetheless, investors should be careful when making a choice between investing in riskless assets, as long-term government bonds, and taking associate market risk of rising equity dividends. 

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