Derek Pain: Why not be bold and take a punt on the stock exchange?

No Pain, No Gain

In these low interest rate days, the stock market is offering increasingly handsome cash rewards as dividends are jacked up. Already it looks as though 2011 will be a particularly good year for income-seeking investors with Capita Registrars estimating that companies will dole out £64.2bn to shareholders, a 13.6 per cent improvement on last year.

If the share registrars are correct the dividend yield is around 4.2 per cent, a return that shames the high street banks and building societies where interest rates are often below one per cent and can even disappear into near oblivion. With inflation so rampant trusting savers are being ripped off.

I am not suggesting those unfamiliar with the often wayward ways of the stock market should rush to buy shares. After all we all know that they can go down, as well as up. But shares do seem these days to be more impervious to worldwide calamities than in the past and there is a strong City belief that they will continue to hold up reasonably well and may resume their advance. Of course, we live in an uncertain world and today's realistic thoughts can appear nonsensical tomorrow. Still for the average saver who follows, even to a limited degree, the stock market, it is a question of being eaten alive by inflation or venturing forth. There are, indeed, signs that individual investors are taking advantage of the current climate as Capita estimates that private shareholders now account for their biggest slice for more than four years of the nation's quoted shares.

This increased interest must, at least in part, be due to dividend considerations, with some Footsie constituents offering comparatively handsome yields. Vodafone, for example, is on 4.7 per cent. I suspect most investors are now prepared to ignore the largely discredited adage – sell in May, go away and come back on St Leger Day (when the horse racing classic is held in September). Such an illogical piece of reasoning stems from distant days when the City slumbered in the summer months as the top hat brigade attended social events (Wimbledon and Henley etc) and other bigwigs decamped to the south of France for extended holidays. Consequently with so many away from the square mile, trading was exceedingly thin and shares drifted lower due to lack of interest.

Examining the past decade, with six summer retreats (averaging 9.15 per cent) and four gains (9.67 per cent), the F&C investment house concludes the stock market these days "is pretty much as likely to rise as it is to fall". F&C's Jason Holland observes: "The fact that sell in May has historically been wrong about as much as it has been right suggests that do nothing could well be the best option."

Capita calculate that £15bn, a near 8 per cent increase, was distributed in dividends in the first three months but points out that this year's total return could still lag behind 2008. Then the financial disasters started to take their inevitable toll with high paying banks under intense pressure and last year the BP oil giant, a major contributor to the dividend jackpot, was forced to suspend payments although it has since returned to the dividend list.

Share buybacks are also a major feature of cash distribution. It is estimated that about £16.5bn will be handed out this year. But, as I discussed last week, the vast body of shareholders will see little, if any, of this return which mainly ends up in the coffers of institutional shareholders.

Ernst & Young's Item Club, one of the multiplicity of organisations offering advice to all and sundry, has said that the nation's firms should, with consumers under pressure, spend hoarded cash. It would appear that the City's cash tide is flowing strongly and, I believe, banks are being unfairly castigated for not handing out business loans quickly enough. And, don't forget, City workers (bonuses and all) are said to have contributed £11bn to the public purse last year through income tax and national insurance contributions. In addition City firms are subject to corporation tax and investors suffer stamp duty. Regulators were largely responsible for the financial meltdown but the City must accept some blame. Even so its contribution to the nation's coffers should not be overlooked.

yourmoney@independent.co.uk