Savers bank on shares as rates look set to rise

STOCK MARKET dividends will continue to offer a vastly superior return to cash, even if the Bank of England does hike interest rates tomorrow as expected.

Experts say it will take more than one rate hike to revive the savings market and shares will still look more tempting for those willing to take a higher risk.

Shareholders are on course for a record £94billion dividend jackpot this year after payments leapt 14 per cent in the third quarter to £28.5billion, according to research from Capita Asset Services.

The FTSE 100 index of top UK stocks now offers an average yield of 3.92 per cent, almost 10 times the 0.42 per cent paid by the average savings account.

Nonetheless, investors should tread carefully as markets are at record highs following a bull run that has lasted more than eight years. SAVINGS WAR Savers should enjoy some relief if the Bank of England’s Monetary Policy Committee does increase base rates by 0.25 per cent to 0.50 per cent tomorrow, in what will be the first hike in a decade.

This is likely to trigger a savings war, as banks and building societies respond by increasing their own rates in return.

However, Anna Bowes, director of independent savings advice website Savings Champion, said with the consumer price index now at 3 per cent savers still cannot secure return.

Shopping around for a top deal helps, but even the best buy easy access account RCI Bank Freedom pays just 1.30 per cent, she added (see more best buys on page 30). an inflationbeating GIANT INCOME By contrast, income investors received a further boost yesterday after oil major BP, one of the UK’s most generous dividend payers, posted a strong set of results.

The oil giant has struggled since the Deepwater Horizon oil spill in 2010, but now its shares have hit a five-year high after quarterly profits doubled.

Russ Mould, investment director at broker AJ Bell, said BP is the third biggest dividend payer within the FTSE 100 and offers the eighth-highest yield at a generous 6.1 per cent: “This is likely to outstrip anything available on cash for some time to come, regardless of what the Bank of England does or says on Thursday.”

BP and fellow London-listed oil giant Royal Dutch Shell, which currently yields 5.96 per cent, have both been boosted by a recovery in the oil price with Brent crude hitting $60 a barrel.

Helal Miah, investment research analyst at The Share Centre, said BP is generating a lot more cash as crude prices climb higher: “We continue to recommend the stock for investors seeking capital growth and income who are willing to accept a medium level of risk.”

A number of other blue-chip stocks on the FTSE 100 offer generous income yields, including British Gas owner Centrica, which yields 7.1 per cent, utility giant SSE, which pays 6.62 per cent, Vodafone at 6.02 per cent, and BT Group on 5.88 per cent.

However, individual stocks and shares are too risky for many, and investors should avoid too much exposure to a single company’s fortunes by investing in a spread of investment funds instead. GO GLOBAL Fidelity personal investment director Maike Currie said that even if the Bank of England does raise rates tomorrow, any further increases are expected to be slow and gradual: “Against this backdrop, the hunt for yield will continue to be a key theme for savers and investors for the foreseeable future.”

She recommends three investment funds for investors wanting a balanced spread of income: Invesco Global Equity Income, JOHCM UK Equity Income Fund and Invesco Perpetual European Equity Income Fund.

You should only invest in the stock market if you plan to leave your money there for five years or longer, to give your investment time to recover if share prices do crash.