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Dividend Alerts, October 2010 Issue
October 27, 2010

27 October 2010

  • New dividend write-up released: Pearson Plc

  • If you're bearish, consider a FTSE 100 Short ETF

  • We value your feedback and suggestions!

  • Know someone who'd like to receive Dividend Alerts?

Dear Subscriber

With the “Comprehensive” Spending Review out of the way it’s now time to announce a new dividend write-up.

If you are a bit "angsty" that the markets are well ahead of any recovery in the real economy and expect the FTSE100 to tank - you know where I am coming from on this -, you may want to read our write-up on a rather simple way to benefit from any collapse of the FTSE100.

As we are long-term investors, we have decided to develop a new section on the website, called “long term investment themes”, starting with the re-emergence of nuclear power and its implications.

New dividend write-up released: Pearson Plc

Following the release of their 9 months results, earlier this week, it’s timely for us to have completed the write-up on the dividend history and prospects of Pearson Plc.

Pearson enjoys solid revenues and earnings. The company also offers an unbroken record of 18 years of increasing dividends and there are no obvious reasons why this can’t continue:

    Click here for a write up on Pearson's dividend history and prospects as from May 2005.

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Ask the Editor: How to benefit from a collapse in the FTSE100?

I believe, it’s rather easy to argue that the FTSE100 will soon come crashing down. Quantitative easing, rock-bottom base rates and government stimulus programmes continue to mask the scale of the problems the United Kingdom faces, notably its massive budget deficit, and huge public as well as personal debt.

I would guess, our harsh new "brave" world may well begin on January 1st, when VAT increase to 20 per cent.

With some indices (nearly) touching or even crossing their Spring 2010 highs you may be tempted to think that something has to give. You may even want to start considering how to benefit from any ‘sudden’ substantial falls.

Of course, long-term investors may simply choose to tough it out, collecting their increasing dividends, hold on to their positions and draw comfort from the reams of statistics which show equities have tended to outperform bonds and cash in the long run.

Yet those investors who want to ‘protect’ their portfolio, have a higher appetite for risk and a limited interest in suffering short-term pain in the hope of long-term gain may want to position themselves for any falls in the UK market.

Shorting the FTSE100 in order to protect your portfolio

One way to benefit from a collapse in the FTSE100 is to “sell the index” using an exchange-traded funds (“ETFs”).

ETFs may be held in most stocks & shares ISAs and SIPPs, but check your provider. You benefit from low charges (usually the TER is around 0.5 per cent) and real-time trading.

While ETFs allow you to essentially buy or sell an index, a commodity or any other financial instrument, and trade it like a share, so-called “Short ETFs” work the other way round, meaning that for instance when an index or commodity drops in value, the value of your share holding rises.

DB x-tracker FTSE100 Short

In June, 2008, the FTSE Group (FTSE), the global index company, licensed to Deutsche Bank the use of the FTSE 100 Short Index as the basis of a db x-tracker Exchange Traded Fund (ETF). It was subsequently listed on the London Exchange, trading under "XUKS".

How does this instrument work?

If the FTSE100 index rises: XUKS falls by the same amount. If the FTSE100 index falls by 10 per cent, your DB x-tracker FTSE100 Short goes up 10 per cent. Its historical performance graph looks like the FTSE100 graph turned upside down.

If you are worried that markets will fall, you may want to consider this type of tracker. It might prove a cheaper and easier way of protecting your portfolio rather than selling your entire portfolio.

In a way, you have not a lot to lose. If markets rise further, your share portfolio will rise with it. If they fall your Short ETF will limit your losses.

Be aware of so-called ‘leveraged’ ETF’s. These offer the potential to make extra gains (or losses!) – for example, a 1 per cent decrease in the FTSE100 index translates into a 2 per cent rise in the value of the ETF. However, if the markets keep on rising you will lose 2 per cent for every 1 per cent increase in the Index.

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Until next time.

Kind regards

Steven Dotsch
Early Retirement

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