Derek Pain: When the return on savings is derisory, it's time to take stock

No Pain, No Gain

In these days of derisory interest rates, the stock market offers some rewarding opportunities for any investor seeking a more reasonable income. Rarely have savings been so poorly serviced. Such are the paltry returns available on the high street – and on the internet – that anyone with cash tucked away in many saving accounts is, allowing for the impact of inflation, actually losing out.

Yet high-yielding shares adorn the stock market. And it is not necessary to seek stocks with dodgy stratospheric returns and run the implied risk that problems are just around the corner. For example, the average return on top shares is about 3.5 per cent although down among small caps the figure is considerably less than 1 per cent. Variable dealing costs distort possible yields but for the buy-and-hold investor their impact need not be too significant.

The income-seeking share buyer should concentrate on blue chips where there is at least a good chance of exceeding the prevailing miserable interest rates that could last for some years.

I realise the misfortunes that have engulfed BP have left a gaping hole in the dividend payments many small shareholders – and institutions – were banking on. The oil company's enforced decision to stop paying anything to its shareholders until the Gulf of Mexico disaster no longer drains its resources is undoubtedly a blow to the dividend-orientated community. It was a major provider of shareholder cash and its disappearance from the dividend list leaves the investment world much poorer and no doubt casts a shadow over the argument that the stock market can offer a reasonable and relatively safe, inflation-beating return.

But two points should be made. One is that a BP-style disaster is a rarity; the other is that shareholders have not lost all their capital and, in the fullness of time, their shares should recover and dividends start to flow again. In addition, bid possibilities linger.

High- street savings accounts were, until recently, regarded as safe havens. But events in the past few years have destroyed such complacency. So why put up with such doleful interest rates? It must be worth considering blue chips as an alternative for at least some savings – but, perhaps, not all – as more than double the usual high street return is available. United Utilities is a relatively safe haven and its shares yield about 6 per cent.

I suppose it could encounter some disaster but then, as recent history proves, so could staid and ancient savings institutions.

Other top shares with dividend appeal include Vodafone, offering 5.5 per cent and British American Tobacco with 4.5 per cent. I doubt if the world will, in the near future, cut its mobile usage or stop smoking. So those yields look pretty secure. Other blue-chip high-yielders include BT and Glaxo SmithKline.

The No pain, No gain portfolio's two Footsie stocks offer less attractive returns although still comfortably beating the high street. G4S, the security behemoth that last week produced half-time pre-tax profits of £142.6m (against £129m) and increased its dividend, is probably on about 3 per cent and Whitbread returns some 2.7 per cent.

The portfolio does contain two high payers. Marston's, the brewer capitalised at £527m, sports a 7.5 per cent yield but, as I mentioned last week, a dividend cut is likely. Even so, I would expect the adjusted return to outscore the high street. And there is also the redoubtable, the printer with a capitalisation of only £17.3m that has distributed more than £6m to shareholders in its five years on the Aim market.

The shares, around 39p, yield more than 8 per cent. As I said in July early indications suggest profits will emerge near to last year's £1.7m and a same-again year's dividend of 3.1p a share will be paid. The company, which has a retail network feeding its Manchester plant, clearly offers a remarkable return in these low interest rate days.

But, despite its record, some wonder whether it can continue to survive recessionary pressures and could be forced into dividend slicing. Yet at the last count it had £2.1m in the bank. It provides frequent trading updates so any problems should be visible more quickly than at other companies – whether fully listed or on Aim.

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