10 top dividend shares for a diversified portfolio

Volatile stockmarkets highlight the benefits of diversification. With that in mind, Stockopedia's Ben Hobson has found the highest-yielding stocks in each of the 10 main industry sectors.

Year to date, the FTSE All-Share index is down by 9.9% and the uncertainty that's been dragging on the UK market is far from over. With the Brexit deadline looming - and the unknown impact that could have on shares - positioning a portfolio has become less straightforward.

Broadly speaking, the stocks that have performed well in 2018 - in other words those that have fallen less than the market - have been a fairly conservative bunch. Fast moving small-caps of recent years have been hit hard in these conditions. But larger, less exciting blue-chip names with foreign market exposure have done rather better.

But will that trend continue into 2019? Part of the answer depends on how the Brexit turmoil impacts on sterling. As we've seen over the past couple of years, movements in the value of the pound can have some very immediate consequences - both good and bad - for shares. 

For instance, straight after the EU referendum in June 2016, sterling fell sharply and shares in many domestic-oriented stocks fell with it. Instantly, their earnings were weaker. 

Simultaneously, companies with international exposure - those that report earnings and pay dividends in foreign currencies like the US dollar - soared. For a year after the referendum, investors in those stocks got a big forex boost on the dividend payouts they received.

You could argue that prolonged uncertainty next year will continue to benefit these rather conservative, often uneventful stocks. But if the political situation eases and sterling rallies, the stockmarket could rally with it. That could be very good news for a lot of domestic shares - but not so much for those less exciting, conservative stocks.

The only free lunch...

This kind of dilemma - although extreme - is nothing new in investing. Rather it’s a nod to the benefits of diversifying a portfolio and positioning for unknown events. 

Diversification - whether it's between asset classes, local and international markets, stock sizes, risk profiles and industry sectors - is all about managing upside and downside exposure. As the American economist Harry Markowitz once said, diversification is "the only free lunch in finance."

With that in mind, this week we took a simple approach to finding the highest current dividend yields on offer in each of the 10 main industry sectors across the FTSE 350. The only rule is that each stock must have a Stockopedia StockRank of more than 80. That means ranking in the top 20% of the market for their overall exposure to the three key factors of quality, value and momentum. 

Source: Stockopedia        Past performance is not a guide to future performance

This is quite a simple approach, but it’s useful in showing how you can quickly add some diversification into a screen that looks for high yield. Without doing this, the screen would be dominated by housebuilders and other consumer cyclicals.

Stocks like the resources giants Evraz and Royal Dutch Shell are sensitive to commodity prices rather than local macro conditions. Plus, their US dollar reporting offers some forex diversification for UK investors.

GlaxoSmithKline is a blue chip that reports in sterling, but its £30 billion of sales in 2017 were broadly split three ways between the US, Europe and the rest of the world. So whatever else happens to Glaxo, it is largely insulated from the economic scene in the UK.

Others, such as firms like Persimmon, the housebuilder, Go-Ahead Group, the transport group, and Pennon, the water utility, are UK centric. But they are either have predictable businesses (such as Pennon), or they could be poised to perform much better if the outlook for the UK economy becomes clearer.

Research is essential when it comes to achieving proper diversification in a portfolio. With so much uncertainty in the market it could be worth considering which shares offer more security in a prolonged downturn, and which could rally if market sentiment bounces back. 

High yields are an appealing option for in times of uncertainty, particularly when the market is falling. This year, larger, more conservative stocks have held up better than most. But that could change in 2019.

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