Why 'sell in May and go away' would have paid off this year

Investors who followed the old investing saying would have benefited from escaping the stock market before the summer.

Sell in May and go away, don't come back until St Leger's Day.

It's one of the oldest sayings in the investment world, supposedly helping investors avoid the seasonal trend of share prices and stock markets performing poorly between May and October, while recording their best performances between November and April. 

And while I found that it's generally not a good idea, this year selling out of shares in May and returning to buy shares in September would have been a splendid strategy. That's because stock markets around the world have taken a nasty nosedive since peaking in late April.

A summer sell-off for shares

Back on 27th April of this year, UK investors were cheering as the blue-chip FTSE 100 index hit an all-time record intra-day high of 7,122. Alas, this peak was soon short-lived, with the main market index diving dramatically during the warm season. Here's how it has fallen over the past four months:

*As at 1pm on 1st September

As you can see, the FTSE 100 has dived from a whisker short of 7,000 on 1 May to just above 6,100 points today. Thanks to this slump of close to 900 points, the main UK index has tumbled 12.5% in four months.

Clearly, faced with a fall of this scale, investors would have done very well indeed to sell out in May before returning to the market today. What's more, with major markets falling all around the world, it could be time for investors to go bargain-hunting.

World markets weaken

Here’s how the world's leading stock exchanges have fallen back over the past four months:

Source: Yahoo! Finance

As you can see, all seven of these major market indices have tumbled during the summer months, largely thanks to the ongoing crisis in China and fears over higher US interest rates.

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Bargain-hunting for British businesses

Only the Chinese, Hong Kong and German exchanges have fallen harder than the FTSE. This might suggest that UK equities have been oversold and, therefore, that there may be big bargains out there.

For investors with large, established portfolios of shares, a 12.5% fall for the FTSE 100 is bad news. However, for investors looking to return to the market, lower prices mean bigger bargains, so valuations today look a lot more attractive than they did four months ago.

In particular, investors seeking to boost their income from regular cash dividends can now add some fairly juicy yields to their portfolios. With the FTSE 100 index now sporting a dividend yield above 4% a year, here are five large, established British businesses whose shares offer delicious dividend yields well above 5%:

Source: Digital Look

As you can see, yearly dividend yields for these five firms range from nearly 7.2% at oil producer Shell to above 5.5% at utility Centrica. What's more, an equally weighted mini-portfolio of these five shares would produce an average dividend yield above 6.4%. This is a mouth-watering income, compared to the pitiful returns on offer from savings account.

With three energy shares in it, this mini-portfolio is over-exposed to oil and gas prices, so it should not form a portfolio on its own. Even so, it shows the incredible dividend income on offer from well-known, long-established, big name businesses.

Don't be afraid of falling prices

During this summer's sell-off, broad-based selling has hit all stocks fairly hard – even those of high-quality, global businesses. With the UK economy in good shape and growing strongly, buying high-yielding shares now and reinvesting those dividends should prove highly rewarding in the years to come.

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