Weekend reading: BP’s dividend and FTSE value

My regular weekend reflection on investing, followed by some good reads from across the web.

I mentioned yesterday that I thought BP shares were a good buy at 435p, but that there were certainly risks to buying.

The biggest short-term risk is that BP’s dividend is cut or suspended, even if it has the cashflow to support it as well as its clean-up commitments. Politics or PR might force a gesture.

A dividend cut or suspension would have implications for all UK investors, not just BP shareholders. Roughly £1 in every £6 paid out by UK shares comes from the oil giant.

This also has an implication for whether the FTSE is currently cheap compared to the risk-free rate of return from UK government bonds, aka gilts.

As of last night:

• The yield on the 10-year gilt was 3.59%

• The yield on the FTSE All-Share was 3.51%

One way of judging their relative value for money is to divide the gilt yield by the equity dividend yield:

• Gilt to equity yield ratio = (3.59/3.51) = 1.02

That low ratio would normally be very bullish for UK equities. The average since the 1950s has been closer to 2, and most times it has dipped below 1 it’s been a very positive for shares (September 2008 was a big exception).

What if BP entirely suspended its dividend? That would reduce the FTSE All-Share yield to below 3%, and push the gilt/equity ratio over 1.2.

Shares would still look pretty cheap on the measure, but they would be more vulnerable to, say, long-term interest rates inching up.

From the blogs

• The calculus of cats and dogs – Get Rich Slowly
• Does paying people more get better performance? – Simple in Suffolk
• How to sell your own home in 30 days – Wealth Pilgrim
• Anatomy of a growth investor – The Psy-Fi blog
• How much money do I need to retire? – Oblivious investor
• A tax on people who can’t do maths – Bad Money Advice
• Investing mistakes I have made – Retirement Investing Today
• Only the poor say money doesn’t buy happiness – Financial Samurai
• Autologic shares under the spotlight – iii blog
• How to make $400 and lose 10 pounds – Planting Dollars
• Radical unschooling – The Digerati Life
• The Australian property bubble – Stock Tickle

From the big boys

• Five unexpected costs in retirement – Yahoo Finance
• Controlling the finance sector’s excess returns – Buttonwood
• Buy a forest – FT
• Banks tighten interest only mortgage rules – FT
• Holidays where the weak pound goes further – FT
• John Lee writes to George Osborne with CGT proposal – FT
• 25% CGT a line in the sand for Tory MPs – Telegraph
• Charlie Bean of the MPC reassures on inflation target – Telegraph
• Fleeing Facebook – The Economist
• Nigerian oil agony dwarfs Gulf spill – The Guardian
• Fun and games with smallcap oil explorers – Motley Fool
• Futuristic vending machines – The New York Times

Subscribe to Monevator for free to get this list every Saturday!