Why stocks trounce the National Savings bond

THERE has been much fanfare – from the Government at least – about the launch of a NS&I savings bond which will pay interest of 2.2pc on balances up to £3,000.

It may beat inflation now, but official figures suggest such a situation may not last – and experts say the rate on the NS&I bond could soon be beaten by ordinary savings deals.

But you could get far more bang for your buck with income super stocks, whose dividend yield far outpaces that offered by NS&I, although its bond returns a guaranteed payment, while with shares your capital is at risk.

Severn Trent is forecast to yield a respectable 3.5pc this year and could grow savers’ cash.

The water supplier’s recent acquisition of Dee Valley could boost returns further as it is likely to lead to cost savings within the group.

On top of that, industry regulator Ofwat is conducting a review of the sector to promote competition. Ofwat wants the water industry to act more like the electricity market, in which customers can change their supplier.

Russ Mould, investment director at AJ Bell, thinks that in order to encourage investment in metering and other innovative services the regulator could let companies such as Severn Trent increase their prices, which would raise profits.

LANDLINE and broadband services provider Telecom Plus has grown its dividend every year since 2011. The firm has a 20-year power-supply deal with Npower that should protect it from the worst of any wholesale energy price increases, says Mould, and it could also help the firm boost its market share.

The big six energy suppliers have all announced price increases, so if Telecom Plus doesn’t have to follow suit it could win new customers. It could also pick up the former customers of other minnows such as GB Energy, which went bust in November blaming price rises. The firm yields 4.1pc and shares are up 33pc over the past year.

Over-50s specialist Saga might be best known for holidays but around 90pc of its profits actually comes from its insurance business, providing a steady, recurring income stream.

Just 3pc of profits come from cruise holidays but that is set to increase as a new ship enters service in 2019 and another could follow two years later.

These new vessels have 50pc more capacity than their predecessors and are cheaper to run too. Experts predict an extra £60m of profit from the division in the coming years – that’s the equivalent of a third of last year’s pre-tax profits. Simon McGarry, senior equity analyst at Canaccord Genuity, says: ‘Crucially its customers – the over-50s group – are the richest, fastest growing demographic in the country, with around twothirds of all UK household wealth.’ The stock yields 4.8pc.

Royal Dutch Shell has not cut its dividend since the Second World War. At 6.5pc, it looks a little dicey at the moment – currently the firm has only half the cash to cover the dividend – but McGarry thinks the rising oil price will help shore up the payout.

OIL cartel Opec has agreed to cut production by 1.2m barrels per day – its first reduction in eight years – and nations outside the group have followed suit.

Some experts predict that as a result the price could reach $60 a barrel this year, up from lows of just $26.

Oil giants were hammered by price falls but it meant that they reined in spending and started cutting costs, which will stand them in good stead as the price rises again. If the oil price rises to $70, Shell’s dividend will be covered more than two times by free cash.

For savers who prefer a fund manager to pick their dividendpaying stocks for them, Darius McDermott, managing director at Chelsea Financial Services, likes the Threadneedle UK Equity Income fund.

This invests in big FTSE firms as well as small companies with a decent yield, including RSA Insurance Group and the grocer Morrisons.

McDermott says: ‘The team avoid stocks which are in fashion – they believe in being patient and having conviction in all their investments, and that has generated high returns.’ The fund yields 4pc.

He also likes the Marlborough Multi Cap Income fund, which focuses on small and mediumsized firms.

With a yield of 4.4pc, its largest investments include pub chain Marston’s and Cathedral City cheese maker Dairy Crest.

McDermott says: ‘This fund offers something radically different from the majority of FTSE 100 income funds.’