Stick with shares to turbo charge your retirement
WheN we are being battered by uncertainty and gloomy predictions, it’s easy to miss the bright spots.
So how about this? If you’ve a portfolio of average UK shares, you could be getting an income of close to 4.5 pc.
The revenue from shares is at its highest since the financial crisis ten years ago, says Laith Khalaf, senior analyst at hargreaves Lansdown.
It’s also outpacing other investments: the gap between the income paid by government bonds ( known as gilts) and shares is at its widest since World War II, says David Goldman, BlackRock Income and Growth Investment Trust co-manager.
There are many reasons behind this, but if you’re looking to boost your retirement income or invest over the long term, then that’s a number to hold on to.
Let’s consider the traditional route for retirement income — an annuity.
If I were to spend £100,000 on one when I turn 60 in March, I’d get about £2,100 a year income linked to inflation; if I die first, Mrs h would get just half this.
If inflation ran at 2 pc I’d have to live until 93 just to break even! The income may be guaranteed but I would have to give up all my capital.
Alternatively, I could put £100,000 into an investment fund of mixed shares, reap double the income and keep the capital.
Yes, shares carry risk, but even after a stock market crash I might retain £50,000 capital — and Mrs h could inherit it all.
So what’s going on? Well the UK stock market remains unpopular because of Brexit, which has held back share prices. however, that hasn’t had much effect on dividends, the income paid by shares. The key figure here is the yield — this is the dividend as a percentage of the share price.
If the share is worth £100 and it pays £5 in dividends then the yield is 5 pc. If the share price falls to £50 and the dividend remains at £5 then the yield would be 10 pc.
Warnings of cuts have so far failed to materialise and last year UK companies paid a record £100 billion in dividends, according to Link Asset Services.
‘The UK stock market looks attractively valued on the global stage, and offers a pretty compelling dividend yield for income- seekers to boot. If it weren’t for Brexit, investors would be snapping up bargains left, right and centre,’ says Mr Khalaf.
Are these dividends actually sustainable? Mr Goldman says: ‘We would highlight the pharmaceutical and house- building industries as looking particularly attractive at present.
‘ however, when assessing dividend sustainability, it comes down to the individual business and their willingness and ability to pay and grow their dividend.
‘ even within these sectors, there are certain companies where we think the yields are not particularly sustainable for various reasons, and thus we need to be selective.’
Shares where the yield has increased because of falling share prices include Royal Dutch Shell — the biggest company on the stock market — where it is more than 6pc.
Lloyds Bank — whose shares I hold — yields 5.3 pc while the share price has been going nowhere. however, that income is far more than I’d get from a Lloyds Bank savings account.
To understand the long-term benefits of income, take a look at stock market performance over the past 20 years.
An investment of £ 1,000 would have grown to a mere £ 1,370 purely on the growth in share prices of FTSe AllShare companies.
But by reinvesting dividends, the investment would have grown to £2,680.
A high yield may suggest a company is undervalued. On the other hand, it may signal that something else is going on, or that there is bad news is ahead and the dividend is unsustainable.
Mr Khalaf cites the case of Persimmon, the house builder, where the yield is 9.5 pc, but he says that includes a special dividend which could dry up in the event of a bad Brexit.
Centrica is yielding 8.7 pc which, he says, looks unsustainable.
On the other hand, lower yields can be a sign of expectation of dividend growth.
Specialist investment funds offer a spread in income shares.
Financial services group Sanlam today publishes its White List, which shows the income funds producing superior returns over five years.
Among those at the top of the list are: Troy Trojan Income (paying 4.1 pc), Axa Framlington Monthly Income (5.1 pc), Miton UK Multi Cap Income (4.7 pc) and Artemis Income (4.5 pc).
Mr Khalaf also mentions Marlborough Multi Cap Income ( 5 pc), Aviva UK equity Income ( 4.8 pc) and Jupiter Income (4.2 pc).
Overseas funds with decent income include Artemis Global Income at 3.3 pc, or ‘for something spicier’, he says, Jupiter Asian Income yielding 4.2 pc.