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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
peopleComedian launches stinging attack on PM
Life and Style
The collection displayed Versace’s softer side, with models wearing flowers and chiffon dresses in unusual colourings
fashionVersace haute couture review
News
Andy Murray shakes hands after defeating Andreas Seppi of Italy in the third round of Wimbledon, Saturday 4 July, 2015
Wimbledon
Arts and Entertainment
'The Leaf'
artYes, it's a leaf, but a potentially very expensive one
News
Yoko Ono at the Royal Festival Hall for Double Fantasy Live
people'I wont let him destroy memory of John Lennon or The Beatles'
News
Could Greece leave the EU?
news
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

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

    Gaping hole at the heart of the European Union

    Treatment of Greece has shown up a lack of genuine legitimacy
    Number of young homeless in Britain 'more than three times the official figures'

    'Everything changed when I went to the hostel'

    Number of young homeless people in Britain is 'more than three times the official figures'
    Compton Cricket Club

    Compton Cricket Club

    Portraits of LA cricketers from notorious suburb to be displayed in London
    London now the global money-laundering centre for the drug trade, says crime expert

    Wlecome to London, drug money-laundering centre for the world

    'Mexico is its heart and London is its head'
    The Buddhist temple minutes from Centre Court that helps a winner keep on winning

    The Buddhist temple minutes from Centre Court

    It helps a winner keep on winning
    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'