When rates go up, try a little bit of juggling

With interest rates set to rise further in coming months, investors seeking income from their savings should find more opportunities out there.

With interest rates set to rise further in coming months, investors seeking income from their savings should find more opportunities out there.

But safe, traditional sources such as building society accounts and bonds will take time to recover from the history of low interest rates over the past 18 months.

Meanwhile equities - traditionally seen as income-generating - are far from promising given the recent decline in share yields. Investors who have traditionally looked to dividends to provide a reasonably steady income, because the returns are less volatile than the capital value of the share, have a problem: where can they invest for income?

Mark Dampier, investment specialist at Hargreaves Lansdown, an independent financial adviser, believes yields have been a victim of the excellent capital growth in the stock market. Even highly successful income-producing unit trusts have suffered. Jupiter Income has a current yield of just 2.99 per cent, while Newton Higher Income is paying 3.36 per cent.

"These are both flagship funds and rightly admired, but their yields are currently low. However, it is true to say that they offer the opportunity for capital growth," he says.

This is not much help for income-seekers, particularly as the future looks equally bleak for income-producing equity funds. "If you believe that technology will drive the economy in future years then traditional income funds will continue to face difficulties because it is a growth sector and is not paying any income," he adds.

The dividend yield is the annual return investors receive when they hold shares or unit trusts. It is expressed as a percentage of the cost of buying those investments. So if the gross dividend - the cut of the profits paid as income to company shareholders - from a share is £5, and the shares are trading at £100, the yield is 5 per cent. If shares rise to £200 but the dividend stays the same, the yield falls to 2.5 per cent.

As share prices have risen sharply over the past couple of years, yields have suffered, and so have income seekers. Even though the aim is to generate a regular income, these investors must now include an increasing number of growth stocks in their portfolio in order to protect the value of their capital.

More and more independent financial advisers are recommending growth stocks to income investors. Mr Dampier favours the HSBC UK Growth & Income Fund and Standard Life's UK Equity Growth Fund. "After all, there is no point in earning 6 per cent income if you are paying for it out of your own capital," he says.

But these choices should be balanced by some of the better-performing income-paying unit trusts. He suggests Royal & Sun Alliance's Equity Income, Framlington's Extra Income and Britannia's Higher Yield funds.

Justin Modray, at IFA Chase de Vere, says changes to the tax structure of individual savings accounts (ISAs) are likely to encourage a continuing move away from shares for income-seekers. Investors in equity ISAs can now only claim a 10 per cent tax credit on dividend income; even this reduced credit will be withdrawn from April 2004.

By contrast, investors can still claim the full 20 per cent tax credit on income distributions from corporate bonds held within the ISA structure, making them far more tax-efficient. Mini-cash ISAs also benefit in the same way.

Voices
voicesSiobhan Norton on why she eventually changed her mind
Life and Style
fashion Designs are part of feminist art project by a British student
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
i100
PROMOTED VIDEO
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Arts and Entertainment
Residents of Derby Road in Southampton oppose filming of Channel 4 documentary Immigration Street in their community
tv
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
News
i100
Extras
indybest
Sport
Scottish singer Susan Boyle will perform at the Commonwealth Games opening ceremony in Glasgow
commonwealth games
News
Lane Del Rey performing on the Pyramid Stage at Glastonbury 2014
people... but none of them helped me get a record deal, insists Lana Del Rey
Arts and Entertainment
Dwayne 'The Rock' Johnson stars in Hercules
filmReview: The Rock is a muscular Davy Crockett in this preposterous film, says Geoffrey Macnab
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

    £300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

    Insight Analyst – Permanent – Up to £40k – North London

    £35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

    Test Lead - London - Investment Banking

    £475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

    Business Analyst - Banking - Scotland - £380-£480

    £380 - £480 per day: Orgtel: Business Analyst - Banking - Edinburgh - £380 - ...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

    Michael Jamieson: Why weight of pressure rests easy on his shoulders

    The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn