Published on 12 August 2010
At our recent client seminars there is one question that was asked without fail whether we were in London, Glasgow, Birmingham or Bristol;
“With interest rates and gilt yields at current levels how can I replace the income that I have lost?"
There is no doubt that with interest rates at record lows the returns on Cash ISAs, deposit accounts and Gilts has never been lower. The search for a decent return has become even more difficult with the recent withdrawal from sale of, the understandably popular, Indexed Linked Saving Certificates issued by National Savings and Investments.
One of the options for clients is to seek to replace lost income with dividends from shares and this would be my preferred choice despite the fact it would involve a significant increase in risk.
The problem with suggesting this solution is that many clients have had their faith in dividends badly shaken and this is totally understandable. Many lost their dividends from their bank shares in the "Credit Crunch" and now the same has happened to shareholders of BP. It could well be many years before these dividends return to their previous levels and of course there is no guarantee they ever will.
However, as bad as these events were/are for the investor it is important to put them into some type of historical context. They were, I would suggest, once in a lifetime events and you should try not to allow them to shape your normal investment strategy. To limit their impact I follow three very simple rules;
Obviously when you start investing you may need to start with one company but the above is something you should keep in mind as the preferred "end solution". They are simple often quoted rules but adherence to them could have saved you from the worst of the above calamities.
I previously covered the subject of investing for the dividend in my January Corner which discussed the theory of dividend investing. It may be a good starting point for those less familiar with dividends and their impact on your investment returns.
To help me identify high dividend stocks I use the stock filters online to provide a list of possible investments for further investigation. The instructions below illustrate my preferred search but obviously you can build your own.
The Advanced Stock Selector allows you to screen companies using a combination of defined criteria which you select - a vetting tool therefore which you can personalise to your own requirements. To access this;
In the indices box I would select the option for "FTSE 100" (I find that when investing for income its best to keep to the larger companies).
Next I enter the income I would like to receive, expressed as a percentage, in the “min” box for "Next Year Dividend yield". (You will find this under the sub-heading Income Ratios). For illustration I have used a figure of five percent.
At the time of writing the filter identified 20 FTSE 100 companies with forecast dividends in excess of 5% for next year. Obviously the list will alter as prices change and so if you were to re-run the search today you may get very different results from mine.
From the original 20 the 10 that I would select in order of personal preference with their current forecast dividend over the next year would be;
A portfolio invested equally amongst these 10 shares would provide a forecast income for the next year of 6% and by doing so you will adhere to the rule of no more than 10% in one stock and no more than two stocks in one sector. If you are a follower of the Barclays Wealth view (to be found in Stocks A-Z under the main Markets, News & Data tab), you may be interested in the fact that they currently favour Man Group and National Grid which are both graded "Buy".
If you are comfortable with the extra risk of equities but do not want to get involved with individual stock selection then you may want to consider an Exchange Traded Fund which does the work for you. Take for example the iShares FTSE UK Dividend Plus (IUKD) which invests in the 50 highest yielding shares of the FTSE 350. It has a total expense ratio of 0.4% pa and an income yield at the time of writing of 4.29%, paid quarterly, and no Stamp Duty is payable on purchase.
If the higher risk of equity income takes you out of your comfort zone then you could consider a different asset class altogether and look at investment grade Corporate Bonds. One of the easiest ways of doing so would once again be via an Exchange Traded Fund, take for example the iShares Markit iBoxx £ Corporate Bond (SLXX). In this case the total expense ratio is 0.2% pa and has a gross redemption yield of 5.42% once again paid quarterly.
Alternatively, if you would prefer the management expertise of a fund you could search the Barclays Stockbrokers Funds Market for funds which invest in Gilt and/or bonds either just within the UK or more globally.
In this regard the choice is broad however it can be a little daunting so to help narrow your search I would encourage you to use the search tools available online within our funds research centre. For example from the factsheet search you can select one of the Gilt and bond sectors from the IMA sector drop down box, for example UK Gilt or Sterling Corporate Bond. If you then want to further filter the list within a specific sector use the Advanced Search option to specify other criteria for example – funds must have a Financial Express Crown Rating of 3, or must be ISA eligible. Try Fund Factsheet Search.
As always I hope you found this article useful.
The values of these investments can fall as well as rise and the past dividend income produced is not an indicator to future dividend payments. Your capital is at risk
Good luck with your investments!
Page last updated 12 August 2010
All data taken from the Barclays Stockbrokers Market, News & Data tab on 1 July 2010 unless otherwise stated.
* Source: Bloomberg website
** iShares MSCI Brazil factsheet
Barclays Stockbrokers is the Group name for the businesses of: Barclays Stockbrokers Limited, a member of the London Stock Exchange and PLUS. Registered No. 1986161; Barclays Sharedealing, Registered No. 2092410; Barclays Bank Trust Company, Registered No. 920880. Registered VAT No 243 8522 62. All companies are registered in England and the registered address is: 1 Churchill Place, London E14 5HP. All companies are authorised and regulated by the Financial Services Authority.
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