Woodford: dividends could grow 10% this year

Invesco Perpetual's Neil Woodford believes dividends of the stocks in his portfolios could grow by up to 10% this year.

Woodford says his IP High Income and Income funds are currently yielding 4.2% - more than 20% over the current market level - and he expects this to grow going forward.

"The yields available on the funds at this point in time are very attractive at the moment," Woodford says.

"For many of the stocks in my portfolio, the dividend yield is above their respective corporate bond yield."

Woodford has warned cyclical stocks will not deliver in 2010, believing corporate earnings expectations are "too optimistic".

"I do not think we have the ingredients for suitable market recovery," he adds. "The market has lost track with valuations. It forgot about fundamentals last year.

"In 2010 and beyond, fundamentals will have greater impact on share price performance.

The overall market does not look that stretched, Woodford says, citing the current P/E of 13.5 times and yield of 3.2% to 3.3%. However, the manager says the market is anticipating 30% profit growth expectations in 2010, which will only lead to "extreme disappointment".

He believes there will be a rotation away from last year's leading stock, believing the  undervalued stocks in his portfolios are at their most attractive valuations than during any time of his career.

Woodford says the UK has a "decent chance" of a downgrade because of the its high fiscal deficit.

"If we take our medicine and address the deficit, we could escape it," he says. "If we do not, we will be downgraded."

He says it is likely there will be a short term pick-up in inflation in the early part of 2010, but this will then lead to a period of normalisation with deflation a bigger challenge over the medium term. This means it is unlikely there will be significant hikes in interest rates, Woodford believes.

Woodford says the portfolios have the flexibility to cope with forthcoming wobbles in the market, although these will not be as severe as those seen at the end of 2008 and early 2009.

While the banking sector has seen a significant spike since March, Woodford will not increase his weightings of the sector as he feels it could be many years before the situations with the banks is resolved. He also says many institutions will need to raise further capital and will continue to deleverage.

"Bank profits will not match what is in share prices," Woodford says.

For the miners, Woodford is still shunning the sector as he feels it deliver the earnings growth the market expects. Woodford says investors are banking on a V-shaped recovery, which is unlikely to happen in his opinion.

The manager also confessed to having more of his own money in his portfolios than at any other time during his career.