How to make your savings pay
Prepared to take risks? Then stocks and shares can yield big dividends
Saturday 07 March 2009
The Bank of England cut interest rates for the sixth month in a row this week, taking the official bank rate to all-time lows of just 0.5 per cent. Although this has been great news for anyone with a tracker mortgage, it's been crippling for savers, who have seen the interest on their accounts dwindle to next to nothing since last autumn. The average savings account is now paying well below 1 per cent, while even the best on the market are offering not much more than 3 per cent.
For those who are saving for the longer run, even savings rates of 1 or 2 per cent represent a decent return on your money after tax and inflation has been taken into account. Six months ago, when inflation was pushing 5 per cent, you needed to be earning more than 6 per cent to achieve a return that kept pace with the cost of living after tax had been deducted. But with inflation now at 0.1 per cent, even 0.5 per cent will leave you with a net real return.
However, for people who have been relying on their savings to generate an income, this is no consolation. Someone with £50,000 in the bank could have been earning a gross income of over £200 a month a year ago. Today, they'll struggle to get half as much from a cash savings account – and will be forced to start drawing down on their capital if they need to maintain their income at the same level.
As a result, more and more people are looking elsewhere for a decent return, with stocks and shares now beginning to emerge as a new favourite for income seekers.
Although investors may have been shaken by the stock market falls of the last week – which saw the FTSE 100 index dive close to its March 2003 lows – the latest dip has helped push up yields on equities to ever more attractive levels. Nevertheless, such high levels of volatility, combined with the ongoing economic uncertainty, mean it's more important to be careful when picking stocks for income. Banks, for example, may be registering prospective double-digit yields, but it's unlikely that these will ever be paid.
However, Robin Geffen, who manages the Neptune Income fund, says that there are a number of quality blue-chip companies which are now offering good yields – and should not pose too much of a risk to your capital if you're taking a medium- to long-term view.
"People are going to continue eating, smoking and using power," says Geffen. "And there are some big quality blue-chips in these areas which offer certainty for investors, and are yielding 4 or 5 per cent."
He cites the likes of AstraZeneca, GlaxoSmithKline, Imperial Tobacco, National Grid and Unilever as a sample of big businesses which his fund has been investing in. "On a three- to five-year view, which is the minimum that investors should be taking, I don't think there's a significant risk to capital in these companies," he adds.
Although some companies are offering dividends of 10 per cent or more, Geffen adds that investors should see this as a warning sign, as these levels of payouts are unlikely to be sustainable. In particular, he says investors should remain wary of the banks, insurance companies and property groups.
Remember that there are never any one-way bets on the stock market – not even the big companies are immune from dividend cuts. Big US firms such as General Electric and the pharmaceuticals giant Pfizer have made cuts to their dividends in recent weeks, which is why you should invest in a number of companies.
Pick a professional
The best, and perhaps the safest, way to do this is to buy an equity income fund, which is managed by a professional fund manager. Do some research before you decide which fund to go for, as some of them are riskier than others. Geffen's Neptune Income fund, for example, is currently yielding around 5.5 per cent, and sits at the lower-risk end of the spectrum. However, there are funds in the same sector yielding as much as 10 per cent – a level which is likely to be unsustainable.
According to Brian Dennehy of the London-based financial advisers Dennehy Weller, around a third of equity income funds have cut their payouts over the last month. Those funds which invested in banks last year have been particularly hard hit.
However, he says there are a number of quality managers who will be able to maintain their current dividend. He picks out the Newton Higher Income fund, managed by Tineke Frikee, which is yielding around 6.5 per cent, and which has been one of the top 10 performers in its sector over the past year. He also likes Standard Life Investments' UK Equity High Income fund, which is yielding around 5.5 per cent. Its largest holdings include Vodafone, Glaxo and British American Tobacco – some of Britain's biggest corporations.
Alternatively, you could consider managers such as Neil Woodford at Invesco Perpetual, who continues to have one of the most impressive records in the equity income world. Over one and three years, his two funds are amongst the top five performers in the UK equity income sector, while over five years, his funds are number one and two.
If you're nervous about making the switch from cash to equities, Dennehy says that you don't need to invest all your cash at once. "If you've got £10,000, for example, then my advice would be to split it into 12 lumps and to drip it into the market over the next year. People forget that if they've got a lump sum, they don't need to invest it all at once."
Unless you're an experienced investor, you should take professional advice before you invest your money. To find an independent financial adviser in your area, visit www. unbiased.co.uk.
If you don't like the idea of investing in the stock market, you could consider a bond fund – which invests in the debt of companies, governments or both. However, as with investing in equity income funds, there's a wide spread of risk amongst the funds on the market, so you should be careful where you put your money.
Again, you can pick up yields of between 2.5 and 10 per cent in corporate bond funds. But the higher the yield, the higher the risk tends to be. Mark Dampier, the head of research at Hargreaves Lansdown, the Bristol-based financial advisers, says very cautious investors should look into M&G's Corporate Bond fund, Jupiter's Corporate Bond fund, or Fidelity's Moneybuilder. These all yield around 5 per cent.
Although Dampier believes there is great potential in the bond market at the moment, he warns that, like equity income funds, these are not without risk. However, he suggests that investors who are nervous about investment risk should split their money and invest a proportion that they are prepared to take some risk with into equity income or bond funds, and leaving the rest in cash.
To find the best cash savings account rates, see our best buy tables on page 64, or visit www.moneyfacts.co.uk.
Under new state pension rules we will all be much worse off
Interest-only mortgages return to give more flexibility to borrowers
Scam alert: make a big noise to beat the crooks
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Five Questions On: GB Energy's new tariff
- 1 iPhone 7 (or iPhone 6S) leaked pictures show similarities to older model — but Apple is fixing the biggest issue of all
- 2 David Cameron refers to 83-year-old Labour MP Dennis Skinner as 'Jurassic Park'
- 3 Alton Towers Air breaks down: 80 people stuck on broken down Monorail during heatwave
- 4 'Help me I'm trapped in a factory' messages keep being found on bottles of vitamin water
- 5 German ethics council calls for incest between siblings to be legalised by Government
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.