Dividend Alerts issue 4

28 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 we are happy to announce a new dividend write-up.

With the FTSE100 index "jojo-ing" higher and higher, I would understand it if you feel a bit "angsty" that the markets are well ahead of any recovery in the real economy and that the FTSE100 may tank in due course. You know where I am coming from on this if you have read previous Dividend Alerts.

In this edition, we are introducing a rather simple financial instrument that you may want to consider if you want to 'protect' your share portfolio or even want 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.

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 guess, our harsh 'brave' new world will begin on January 4th, when VAT increase to 20 per cent.

With some indices (nearly) touching or even having breached 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 exchange-traded funds (“ETFs”).

ETFs may be held in most stocks & shares ISAs or SIPPs, but check this with 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 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 when an index or commodity drops in value, the value of your ETF rises.

Introducing: 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".

Basically, if the FTSE100 index rises XUKS falls by the same amount. Conversely, if the FTSE100 index falls say by 10 per cent, your DB x-tracker FTSE100 FTSE100 Short goes up 10 per cent.

Its historical performance graph looks like the FTSE100 graph turned upside down. Use the Chart 'functions' to compare the performace of XUKS against the FTSE100 Index.

If you are worried that markets will fall, you may want to consider this type of tracker. It may 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.

What about "leveraged ETF's"?

Be aware of so-called ‘leveraged’ ETF’s. These offer the potential to make extra gains – 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.

We value your feedback and suggestions!

As the core group of users of Early Retirement Investor.com, I am particularly interested to hear your views on the website and any ideas and suggestions you may have to improve the site.

This is your chance to help shape the future of our web site. Here is the link to our feedback, ideas and suggestions page.

Thank you for reading.

Until next time.

Kind regards

Steven Dotsch

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Dividend Alerts is an unregulated product published by EMAR Publishing, publishers of Early Retirement Investor.com

EMAR Publishing is not registered as an investment advisor or financial advisor. We do not and will not provide personalised investment or financial advice, or individually advocate the purchase or sale of any security or investment. We publish opinionated information about the stock market and companies that we believe our subscribers may be interested in.

There is no guarantee that dividends will be paid. Figures are calculated using the closing prices. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares featured.

Past performance and forecasts are not reliable indicators of future performance. Shares are by their nature speculative and can be volatile. Your capital is at risk so you should never invest more than you can safely afford to lose.

Information in Dividend Alerts is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment or financial decisions. Appropriate independent advice should be obtained before making any such decision.

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