The nice little earners
YIELDS AND RETIREMENT INCOME
IF YOU are looking to generate income from your savings and investments one figure matters more than any other – and that is the yield.
This shows the return you get every year, expressed as a percentage of the amount of capital you originally put in.
To take a simple example, if you invest £1 and get income of 5p a year in return, your yield is 5 per cent. This applies whether you hold government bonds, dividend-paying shares or invest in a buy-to-let property.
It also applies to savings accounts, although most people refer to the income from cash deposits as the interest rate.
Some asset classes have no yield at all, notably gold and Bitcoin, which pay neither interest nor dividends.
Yields become more important in retirement, when instead of trying to grow pensions and other investments, you start drawing income instead.
After the financial crisis, when the Bank of England (BOE) slashed interest rates almost to zero, bond and savings rates collapsed, in a disaster for retirees who relied on the income to top up their state pension. Many were forced to switch their deposits into riskier, higher yielding asset classes – primarily shares and property – in what was dubbed the “hunt for yield”.
This lasted a more than a dozen years until inflation returned and the BOE hiked interest rates to give savers and annuity buyers a decent return again, said Anna Bowes, founder of Savings Champion.
Many expected the BOE to start cutting rates this year as inflation retreated, but it has not acted yet. “This is good news for savers, who can still get more than 5 per cent a year.that is more than double April’s inflation rate of 2.3 per cent.”
Oxbury Bank pays a best buy rate of 5.02 per cent on easy access, while Monument Bank pays 5.01 per cent.
Government bond yields have also been creeping back up, with a two-year UK gilt now paying 4.52 per cent a year.
Rising bond yields are good for income seekers but have a surprising effect on share prices, said Axel Rudolph, senior market analyst at online trading platform IG. “They exert downside pressure on stock markets with most major indices now trading lower as a result.”
When bond yields rise, investors get a higher rate of interest without having to take the risk of investing in stocks and shares.this partly explains why the FTSE 100 has fallen in recent days, after hitting all-time highs not so long ago.
However, the UK’S blue-chip index is also a terrific source of income, with AJ Bell forecasting it will yield 3.8 per cent across 2024.
Investors who are happy to buy individual FTSE 100 stocks can bag higher yields, but with added risk.
The most popular UK companies among AJ Bell’s stocks and shares Isa investors are all renowned for their dividends.
Oil giant BP was the most bought stock last month. It currently yields 4.53 per cent. Utility giant National Grid, which yields 6.87 per cent, is also popular.
Some stocks offer even higher yields, with wealth manager M&G offering income of 9.79 per cent a year. Legal & General Group yields 8.11 per cent. However, dividends are not guaranteed. Until recently,vodafone Group was yielding 10.5 per cent, the highest on the index, but it plans to slash its dividend in half next year.
AJ Bell’s head of investment analysis Laith Khalaf said as a rule, the higher the yield, the higher the risk. “Ideally, income seekers should spread their money between asset classes, including cash, bonds, shares and possibly even property, rather than putting all their eggs in one basket.”