How to find income far higher than you’ll ever get from the bank ... in dividends
SEARCHING for a decent income from your savings and investments has rarely been more challenging. In climbing terms, it is more akin to summiting the ferocious K2 mountain in midwinter (as some brave hearts have just thrillingly done – please get down safely) than indulging in a spot of fell walking in the Lakes (lockdown rules permitting, of course).
The income landscape is indeed bleak. Interest from most mainstream savings accounts is now so miserable it is more likely to be measured in pence rather than pounds.
So, put £5,000 in an instant access Isa (‘issue 9’) with the mutually owned Nationwide Building Society and you will be rewarded with 50p worth of annual interest for lending them your money.
Hardly mutual, hardly worthwhile (interest of 0.01 per cent) and hardly putting customers first, although the big banks are equally parsimonious.
With interest rates more likely to go down rather than up in the near future – and don’t rule out negative rates – it’s no wonder that money under the mattress is looking more attractive to some than an account with a high street bank or building society.
Until recently, National Savings & Investments was the saver’s friend with interest rates so favourable they caused the organisation’s customer service to buckle under the weight of demand. But savage rate cuts late last year put paid to its ‘good guy’ image and triggered a stampede for the exit doors.
Talk about marching customers up the proverbial hill, only to march them swiftly back down again. Does Ian Ackerley, NS&I chief executive, think he is today’s answer to the Duke of York? Personally, if I was the Chancellor of the Exchequer, I’d send him packing for the chaos he has caused at the helm of the Government’s savings bank.
With ten-year Government bonds also yielding a paltry return of 0.35 percent a year, it leaves precious few attractive income options available.
A BRIGHTER OUTLOOK FOR UK DIVIDENDS
SPEAK to some investment experts and they believe there is an answer for many income seekers. It lies in the growing dividends some companies – listed here in London – are expected to pay in the coming years as the world starts recovering from the very worst that Covid-19 has thrown at it.
Last year was an annus horribilis for UK dividends with scores of companies either suspending or cutting payouts in the wake of the pandemic and economic lockdown – some, such as the banks, required to do so by regulatory authorities.
Although swathes of businesses are still in no position to reinstate their dividends, the overall picture is brighter than it was last spring.
Russ Mould is investment director at wealth manager AJ Bell. He believes investing in UK equities for income has been ‘a pretty hairraising experience’ over the past year. Yet he detects light at the end of the tunnel. He says: ‘The good news is that analysts expect the FTSE 100 Index’s total income payout to rebound this year by some £ 11 billion – or 18 per cent – to £71 billion.’
At current market levels, he calculates this would support an annual dividend for FTSE 100 companies equivalent to 3.6 per cent.
Mould adds: ‘This would beat cash and Government bonds hands down and more than cover the current rate of inflation which is trickling along at 0.3 per cent.’
Yet, there are risks. Share prices can go down as well as up which means investors are putting their capital at risk in exchange for this promise of a more attractive income. Also, there is no guarantee that the forecast jump in dividends will materialise. As Mould says: ‘If the coronavirus vaccines have unforeseen side effects, the roll-out goes more slowly than planned, or the UK goes into double-dip recession, then 3.6 per cent may be off the table.’
Michel Perera, chief investment officer of Canaccord Genuity Wealth Management, also predicts a ‘brighter’ outlook for UK dividends this year although like Mould he says investors need to be aware of the risks.
He says: ‘ Investors should be careful about the sectors and stocks they invest in. Also, the value of shares fluctuates, often significantly, and any dividend stream is not guaranteed.
‘But with interest rates not increasing any time soon, investing some savings in equities is probably a good idea to generate income.’
WHICH STOCKS OFFER BEST INCOME HOPES?
FUND manager James Mee works for investment house Waverton and runs its £ 106 million Multi-Asset Income Fund. He says investors should look for companies capable of generating growing cash from their operations – cash that can then be used to pay shareholders dividends. ‘ Consistency and sustainability’ of dividends, he says, is preferable to ‘income-maximisation’.
He also believes investors need to think beyond the UK and look to Europe and the United States. Among his favourite dividend friendly stocks is retailer Tesco that is expected to pay an attractive ‘special’ dividend – around 51p a share – in the first half of this year on completion of the sale of its Asian business to Thai retailer CP Group.
In the US, he likes financial deriv-
atives specialist CME Group and in Europe Deutsche Post, the world’s largest courier company.
He adds: ‘By looking overseas, investors are likely to receive a lower dividend yield on their equity investments when compared to UK companies. But last year was a lesson in the importance ofdi versifying one’s income risk, and on focusing on quality rather than quantity of income.’
The respective dividend yields on Tesco, CME Group and Deutsche Post are 4.8 per cent, 3.1 per cent and 3 per cent.
Carl Stick, manager of investment fund Rathbone Income, sees ‘tremendous value’ in the UK stock market provided Covid- 19 is defeated, paving the way for a recovery in the economy.
He particularly likes stocks that should benefit from an upturn in the economy – the likes of commodity giants Rio Tinto and BHP whose shares yield in excess of four per cent. He also believes the future now looks rosier for the oil sector. Despite high profile dividend cuts last year by Shell and BP, he says future dividends now look ‘ both attractive and sustainable’.
Both companies, he insists, will be ‘an integral part of the green energy solution’.
Rathbone Income’s biggest holding is Legal & General. With its shares yielding an eye-watering six per cent, Stick says the business has a rock-solid balance sheet, and is ‘ core to the financing of the nation’s infrastructure’.
Ian Williams runs the Charteris Premium Income investment fund which only invests in FTSE 100 companies. Like Stick, his fund is invested in a mix of mining stocks and insurance companies. Among the fund’s 25 holdings are Rio Tinto, BHP and insurers Prudential and Legal & General.
He says that as the world shifts towards non-carbon fuels, demand for the metals that Rio Tinto and BHP mine – such as copper and nickel – will rise substantially, increasing prices and the cash the two businesses generate. This will result in both ‘higher share prices and higher dividends’.
AJ Bell’s Russ Mould also believes mining stocks are a good dividend source for investors. He likes FTSE 100-listed Anglo American, stating that if there is a bout of rising commodity prices, the company’s profits would ‘motor, dragging up the dividend for good measure’.
Other dividend friendly stocks that he likes include tobacco giant Imperial Brands – ‘could generate plenty of cash and pay dividends for a good while yet’ – utility giant SSE (‘ on track to increase last year’s 80p-a-share dividend in line with inflation’) and Unilever.
Like Waverton’s Mee, he is also a fan of Tesco because of the forthcoming special dividend and sticking ‘to the basics of keeping the nation fed and watered’.
Finally, Richard Hunter, head of markets at wealth manager Interactive Investor, says the country’s biggest banks – a rich source of dividends in the past – could start paying dividends soon.
He says: ‘It was clear from the recent third quarter reporting season that the banks were adequately capitalised and capable of returning to dividend payments.
‘Indeed, most of the banks expressed a desire to be allowed to announce dividends at their fullyear results. It remains to be seen whether the banks will return to such payments with all guns blazing, depending on the economic situation. But when Barclays kicks off the full-year reporting season on February 18, the picture will begin to become clearer.’