No Pain No Gain: Dividends are worth taking into account

In these days of extremely low interest rates, it is surprising that so many people with cash to invest ignore the stock market. They seem to prefer allowing their savings to rot away in high street accounts or speculating in dubious get-rich-quick investment schemes that invariably end in wounding losses and heartbreak.

Yet the much-maligned share business offers, by today's recessionary standards, some quite spectacular returns. It is possible to obtain yields of 4 or even 5 per cent-plus from top-class companies. Shares, of course, may fall in value, reducing the capital element for a time, although their long-term record suggests eventual progress. Still, there is little danger of dividends being cut; they will probably grow. So, taking a long-term view, savers are in more rewarding hands by entrusting money to blue-chip equities than by supporting the banks, building societies and other saving institutions that offer such poor returns. And they should, of course, always ignore those cold calling tales of easy riches.

I am not suggesting you charge willy nilly into the stock market. But savers should examine the dividend returns of the top 350 companies. Avoid the few with exceptionally high yields – almost certainly their dividends will be cut, and perhaps even eliminated. But there is a host of solid businesses in the 4 to 5 per cent category that deserve attention.

The merit of backing the stock market is underlined by the Motley Fool investment service. Its research suggests that £1,000 stuck in a savings account ten years ago would now be worth £1,127, whereas the same amount invested in the stock market would have more than doubled. And Capita Registrars calculates that in the first half of the year private investors scooped £4.7bn in dividends and are on target to enjoy around an £8.8bn inflow (up 10 per cent) over the year. The Capita research could even indicate that there is a vague chance that some savers are switching to shares. It reports that private investors embarked on a summer spending spree and now account for 11.3 per cent (£215bn) of stock market capitalisation.

In its early days, when high street saving rates were much higher, the no pain, no gain portfolio did not pay much attention to yields. Capital gains were the order of the day, particularly among small caps. However, it did enjoy accommodating some top yielders, such as the once powerful but now departed Scottish & Newcastle brewing group that at times offered around 6 per cent. Another constituent was Printing.com, a small cap that has enjoyed a high-paying reputation since its maiden dividend in 2005. Even after cutting its payment this year, the profitable printing group still, with its shares around 30p, sports an 8.3 per cent yield. The shares departed the portfolio early last year, providing a smallish profit. But of course dividends, like dealing costs, are not included in the portfolio's profit and loss calculations.

Dividend yields should no longer be the poor relations in investment decisions. With interest rates so low, they should be uppermost in investors' minds. Of the current dozen portfolio constituents, nine are in the dividend paying fraternity. Yields are now an important consideration when deciding portfolio membership. The latest recruit, the insurance broker Brightside, joined the dividend list last month and indicated a progressive payments policy.

Last week I removed Hargreaves Services as its shares fell below my 700p selling level. Although crashing to 550p at one point, they have staged a recovery but are still a long way from the 1,200p-plus enjoyed earlier this year. The company has always, like the nine in the portfolio, adopted the sensible attitude of rewarding shareholders. Present yield is around 2.5 per cent.

Two of my three non-payers – SnackTime and TEG – are unlikely to be in a position to send cheques to shareholders for some time. The third, Northern Petroleum, is profitable and I can see no reason why it should not join the dividend list.

SnackTime, a vending machine group, is busy cutting costs, including directors fees, and TEG, involved in composting technology, has reduced its interim loss from more than £8m to £1.8m. Both groups are making headway.