The Prudent Investor looks at how to invest in shares
First, I would like to extend my deepest gratitude to Joe Garner, the chief executive of Nationwide Building Society, for generously passing on 0.1 percentage points of the recent 0.25 percentage point base rate rise to savers such as me.
I’ve been with Nationwide for more than 30 years, so you can imagine my unbounded joy when I heard the interest on my Loyalty Isa and Loyalty Saver accounts was to rise from 1 per cent to 1.1 per cent.
Mr Garner knows about rewards — this newspaper recently calculated that his job perks last year were worth £595 a day. Nationwide savers would need £54,000 in a ‘loyalty’ account to earn that amount in a year.
This is why, if we want a decent income and the possibility of protecting our savings against inflation, we must turn to shares.
Many companies pay an income to shareholders known as a dividend. When I was a young reporter, I was told that if I wanted an income from Lloyds Bank, I should choose its shares, not its savings accounts.
This year, it is 5.01 per cent, according to Hargreaves Lansdown. Its Cash Isa Saver pays a measly 0.35 per cent and its two-year fixed-rate bond pays 0.5 per cent. So if you tied up £2,000 with Lloyds, it would, after two years, pay just £20 interest — while £2,000 in shares would receive £100 this year alone.
Elsewhere, HSBC Holdings pays around 5.38 per cent in dividends and Direct Line at 6.29 per cent. These pale beside RBS, which is tipped to pay close to 6.8 per cent, and British Gas owner Centrica at 8.09 per cent — which will no doubt lift the hearts of customers facing price rises.
Banks shares: If you bought £2,000 in Lloyds shares, you would receive £100 this year alone
Of course, holding shares carries risks, not least that the price could fall or the dividend income could reduce or fail to materialise. We can mollify these by opting for investment funds, where the manager will hold a range of income-producing shares.
I hold Marlborough Multi Cap Income, which paid out 4.2 per cent over the past year — four times what Nationwide has paid me. Over five years, it has paid out £23.70 for every £100 invested.
Artemis Income paid me 3.62 per cent over the past year and Newton Global Income 2.83 per cent. Even Vanguard’s basic FTSE UK All Share Index paid 3.37 per cent. All have delivered significant increases to my capital. The investment management company Sanlam produces a regular study of income funds, ranking them on seven factors including income, performance and volatility.
Its list is headed by Slater Income, which has paid £24.82 per £100 invested over the past five years, and AXA Framlington Monthly Income, with £26 over five years. Both have also delivered capital growth.
Funds focusing on producing income are out of fashion because their overall returns have been so much lower than flashier growth funds in recent years.
But for those happy with some risk, they still knock returns on savings accounts into a cocked hat. ‘Dividend payments from FTSE 100 companies this year are expected to total £87.5billion, which equates to a yield of 4.4 per cent — a far higher return than is available from cash savings and bonds,’ says Philip Smeaton, chief investment officer at Sanlam UK.
Yield means the income paid as a percentage of the share price. If a share is worth £100 and it pays £3 income, the yield is said to be 3 per cent. If the share price drops to £50, but the income remains at £3, then the yield is said to be 6 per cent.
That’s significant because Mr Smeaton warns that the recent rise in the dividend yield of several companies is due to their share price falling. Adrian Lowcock, head of personal investing at Willis Owen, says: ‘Excluding special dividends, the expectation is that dividends will grow by 6.9 per cent for the whole year.’
Yield: If a share is worth £100 and it pays £3 income, the yield is said to be 3 per cent
Where does he look for income? Threadneedle UK Equity Income has increased a £10,000 investment to £17,127 over the past ten years and paid £5,433 income on top.
Mr Lowcock says: ‘The manager is a pragmatic analyst, looks to the longer term, has flexibility and has served investors well over time.’ Fidelity MoneyBuilder Dividend has turned £10,000 into £14,441 while paying £5,400 income. Its portfolio of around 80 stocks can protect investors from market shocks.
‘The manager takes a very methodical, steady approach with a measured attitude to risk-taking,’ says Mr Lowcock.
For those prepared to take more risk, there is Unicorn UK Income. It has increased every £10,000 to £25,569, paying £8,300 income. It invests primarily in small and medium-sized firms. This could add diversity if you have mainstream UK equity income funds.
For those not ready to take income, reinvesting it can turbocharge returns. The FTSE 100 has turned a £10,000 investment into £13,275 over 20 years, which doesn’t seem much — but if you had reinvested dividends, you would have £26,323.
If you had reinvested income in an income fund of average performance, you’d have £35,535.
Markets fall as well as rise, but for long-term returns, I know where I prefer to keep the bulk of my money — and it’s not with Mr Garner’s Nationwide.