Lower rates spur income growth: Strategies offered by financial expert ANNE ASHWORTH to increase your earnings
Rewritten Article:
Dive into Dividends: Boost Your Income with Stocks and Funds
Interest rates are on a downward spiral, causing a sigh of relief amongst borrowers. However, this isn't all sunshine and roses for savers, whose income from their savings is taking a hit. Following last week's cut, the Bank of England base rate now stands at 4.25%, with predictions it could fall to 3.75% by the end of the year. As a result, some of the £1.9 trillion stashed in UK bank and building society accounts is looking for a new home.
Deposit rates are already being trimmed, but multinational companies are set to distribute a colossal $1.83 trillion in dividends this year. This follows a record haul of $1.7 trillion in 2024, as shown by the latest Janus Henderson index. The UK's FTSE 100 companies are expected to reward their investors with £83bn in dividends, according to AJ Bell. The total yield could reach £90 billion, according to the Computershare Dividend Monitor forecast. In May alone, about £9bn will be distributed, with groups such as Aviva and Lloyds Bank leading the charge.
These numbers suggest that the stock market could be the way to boost the income from a chunk of your cash. This involves a gamble if you're used to the security of deposit accounts and National Savings & Investments. But the rewards can be considerable, and there's potential for some longer-term growth, especially if you seize some of the opportunities in UK plc.
US companies are typically stingy towards their shareholders, with the average dividend yield from tech giants like Alphabet and Meta being only about 0.40%. By contrast, the yield on the FTSE 100 is 3.7%, calculated by dividing the share price by the dividend.
Sue Noffke, manager of the Schroder Income Growth Fund, suggests creating a broad share portfolio to compensate for interest-rate cuts. She says, "Other global markets are typically lower-yielding. The UK market also has an interesting mix of companies that derive approximately 75% of their revenues from overseas."
Are you intrigued by this route to boosting your income? Here's how to make the most of the dividend bonanza and back Britain while exploring Europe and venturing further afield.
The British Way
The growing interest in UK shares reflects the desire to diversify away from the US, a trend that is set to continue despite Wall Street's recovery following this week's US-China trade deal. James Coker of Quilter Cheviot says there's another reason why the UK is a 'compelling destination'.
He explains, "Britain has more mature companies in industries like financial services, mining, and oil, which can deliver dividends without compromising day-to-day operations." Mr. Coker adds, "UK companies may not enjoy the lofty valuations of the businesses like the Magnificent Seven titans. But this can make them more defensive at times of market turmoil."
In recent weeks, investors have been snapping up shares in FTSE 100 stocks such as the mining giant Rio Tinto, whose yield is 5.82%, the pharmaceutical giant GSK with 4.81%, and HSBC with a 5.67% yield. The Kepler consultancy reports that BP has been another favourite, offering a yield of 6.37%. The oil giant's shares are recovering on rumours that it may receive a bid from none other than its longstanding rival Shell - whose yield is 4.27%.
Kepler also highlights the popularity of the insurer Legal & General, trading on a yield of 9.3%. Income-seeking investors will be hoping the share price could soon reflect the streamlining of the business under the new-ish chief executive Antonio Simoes. Meanwhile, over the next three years, Legal & General means to return some 40% of its £13.8bn market capitalization to investors through dividends and share buybacks.
When a company buys back its own shares, this reduces the total number of shares on the market, which should give a fillip to the share price and also increase the value of the dividends for each remaining share. AJ Bell says that FTSE 100 companies had already unveiled £29bn in share buybacks by the start of this year, with more likely to be announced, especially given the current appetites of US and international investors, who are in the middle of a buyback boom.
British American Tobacco may have recently bought back £900 million worth of its shares, but its current dividend yield is an eye-catching 7.88%. This is certainly attractive, but the company's challenges include successfully delivering its 'innovation package' of smokeless products for the shift away from cigarettes and dealing with litigation in Canada over the damage to health from cigarettes. This underlines the potential jeopardy of relying only on high-yield companies and the wisdom of spreading your bets.
The Fund Route
Such is the desirability of dividends that funds and investment trusts that prioritize these distributions are dubbed 'aristocrats' and heroes. As many as 20 'dividend hero' trusts have increased their dividends over at least the past 20 years. These long-established names like City of London, Merchants, Murray Income, and JP Morgan Claverhouse offer yields of 4.72%, 5.41%, 4.68%, and 4.87%, respectively.
To make the most of this dividend bonanza, consider investing in funds like Temple Bar, SPDR S&P Euro Dividend Aristocrats, Artemis Global Income, and Jupiter Asian Income, each offering diverse growth potential. And remember, always do your homework before investing, as all investments come with their own risks and rewards.
Happy investing!
Enrichment Data:- Researching High-Yield Stocks: - Use financial websites such as The Motley Fool, AInvest, or Morningstar Direct to find comprehensive data on high-yield stocks like SDCL Energy Efficiency Income Trust and Ithaca Energy. - Read news updates and analysis on high-yield stocks to stay informed about the current market trends and economic conditions. - Utilize financial databases like Morningstar to access detailed data on dividend stocks, including yield, market capitalization, and performance metrics.- Sector-Specific Trends: - Focus on sectors that have traditionally been high-yielding and resilient, such as renewable energy, tobacco, and specialty retail. - Stocks in these sectors often have strong cash flows, making them attractive to investors.- Dividend Yield and Payouts: - Look for stocks with high dividend yields, but be cautious of unusually high yields that may indicate future dividend cuts. - Consider the dividend coverage ratio to ensure the company can reliably pay its dividends.- Investing in Funds: - Dividend-focused funds like Temple Bar, SPDR S&P Euro Dividend Aristocrats, Artemis Global Income, and Jupiter Asian Income diversify investments across various sectors and countries, reducing risk. - Research each fund's performance, top holdings, and management fees before investing.
- In light of declining interest rates, some savers are seeking alternatives to secure higher returns, and investing in stocks and funds that offer dividends could be an option.
- The stock market, particularly UK companies like FTSE 100, may provide a potential avenue to boost income, as numerous companies are expected to distribute substantial dividends.
- A broad share portfolio could be beneficial in compensating for interest-rate cuts, as other markets may have lower yields. The UK market, with a mix of overseas-revenue generating companies, could be advantageous in this regard.
- Investing in dividend-focused funds, such as Temple Bar, SPDR S&P Euro Dividend Aristocrats, Artemis Global Income, and Jupiter Asian Income, may help diversify investments, reducing risk, and offering diversified growth potential in the dividend bonanza.
