Is it really wise to invest in just one company’s shares?

WHEN you consider that Lloyds Bank pays its savers as little as 0.2 pc while its shareholders get closer to 5.6 pc a year, you might wonder if your money is in the right part of the

bank. But is investing cash in a single firm a good idea? The first thing to acknowledge is that investing in any one share carries more risk — even if you pick a FTSE 100 company like Lloyds.

‘There is the potential to lose capital with single shares which is a risk you don’t have with a savings account,’ warns Adrian Lowcock, head of personal investing at fund platform Willis Owen.

But there are ways that investors looking for an income to mitigate this risk, can still cash in. The dividend, or portion of annual profits per share, paid to investors by some UK firms is tempting. When converted to a percentage, the dividend is referred to as a yield. This is worked out by dividing the annual dividend by the current share price.

High-yielding shares include Shell at 5.7 pc and Legal & General at 6.1 pc.

With a £10,000 investment, that would deliver an annual income of £570 and £610 respectively. Shell pays dividends quarterly, L&G twice a year.

A high yield can denote that a firm is out of favour as it reflects a share-price drop. Many UK share prices are currently marked down due to Brexit concerns or because fastgrowing tech firms are more attractive, Mr Lowcock says.

High yield doesn’t always signal trouble. Legal & General is paying 6.1pc but its mainly upward share price suggests the business is sound.

Some firms pride themselves on never disappointing shareholders. ‘Shell is a fantastic, well-managed business which hasn’t cut its dividend since World War II,’ says Lee Wild, equity strategy head at online platform Interactive Investor.

However, any yield over 7pc should raise a red flag. For him, the key factor to sorting the wheat from the chaff is dividend cover. This shows how many times a firm’s net profits can cover a payout, or if it will be made at all.

If a firm cuts its dividend or fails to pay out, its share price may plummet, leading to serious capital losses for investors.

Mr Wild says: ‘You want to see a figure of 1.5 times at least to make sure the dividend is sustainable. Anything below one suggests the company is borrowing to pay the dividend — a cause for concern.’

Bear in mind these figures are based on the previous year’s data and are not guaranteed.

The easiest way to lessen the risk is to avoid investing your nest egg in just one company.

‘If you have £4,000 out of a £1 million portfolio in one company’s shares then a capital loss won’t hurt too much,’ says Ben Yearsley, Shore Financial Planning investment director. ‘But if you’ve got £4,000 of £10,000 savings, then you are rather dangerously overexposed.’

And splitting your investment between firms in different industry sectors lessens risk.

Mr Wild recommends between five and ten companies, while Mr Yearsley says up to 15.

However, the research will be too great for some investors, and there are trading costs. Interactive Investor charges between £3.99 to £7.99 a trade, depending on a monthly plan. The Share Centre charges £7.50 per deal for amounts less than £750 and 1 pc for those greater. One answer is to delegate the process to a fund manager. You will pay a small fee and the annual yield could be a less interesting 4pc to 5pc. But, according to Mr Lowcock, the sacrifice may be worth it. ‘The yield will be less as the manager won’t necessarily choose the highest-yielding shares, and charges may be taken from income. ‘But you’re getting expertise, diversification and risk management, not just of capital but loss of income too,’ he says. His preferred funds are Threadneedle UK Equity Income on 4.2pc and Man GLG UK Income with 5.6 pc. A £10,000 investment would pay £420 and £560 yearly income, respectively. Mr Yearsley likes JO Hambro Equity Income and Artemis Income. Both offer a 4.5pc annual yield. On a £10,000 investment this is £450 a year. He says investment trusts, which can hold money from good years to pay out in leaner times, can be a good option. He likes Temple Bar while Mr Wild’s pick is City of London, which has raised its dividend annually for more than 50 years.