Will they or won’t they? That’s the question that many are asking about the members of the Bank of England’s rate-setting Monetary Policy Committee (MPC).
Will they order one or two more cuts this year and will they act as early as next month, following this week’s favourable economic figures?
But while lower rates are a boon to borrowers, millions are wondering how they will secure an income.
Already banks are trimming returns and National Savings & Investments has overshot its Treasury-set funding target. Premium Bonds and other schemes may soon be paying less.
But if you wish to improve your income, this could be the moment to explore the stock markets. Share prices have rebounded following the recent turbulence. The FTSE 100 is up 8 per cent since the start of the year and the US S&P 500 is 17 per cent higher.
Vanguard: If you wish to improve your income, this could be the moment to explore the stock markets
Duncan Lamont of asset manager Schroders emphasises the benefits of shares: ‘As data from 1926 to 2023 illustrates, shares have been less risky than cash when it comes to delivering long-term inflation-beating returns.’
In the second quarter, dividends from British companies surged by 11.2 per cent to a record £36.7billion.
Meanwhile, investment platform AJ Bell’s Dividend Monitor shows that FTSE 100 companies will pay out £78.6billion this year and £83.9billion in 2025.
If you want some of this bounty, here are the routes to explore.
SHARES
The new focus on dividends is illustrated by the 14 per cent leap this week in shares of insurer Admiral, owner of Confused.com.
Admiral chief executive Milena Mondini de Focatiis announced a bounce in customer numbers and profits, but the City was almost more excited by the more-generous-than-forecast dividend.
Admiral’s dividend yield is 4.93 per cent (this figure is calculated by dividing the dividend by share price). The average yield for the FTSE 100 is 3.6 per cent.
Many companies are more generous, such as telecoms giant BT with 5.58 per cent and tobacco group Imperial Brands with 7.14 per cent.
Yet investors should be cautious because the yield rises as the share price falls, which may spell trouble.
For example, the yield on the British fashion house Burberry is an alluring 9.15 per cent.
But the beleaguered business suspended the dividend last month – at the same time as it replaced its chief executive.
Telecoms group Vodafone’s yield is 10.63 per cent but payouts are to be halved to fund mobile network expenditure.
Richard Hunter of broker Interactive Investor suggests you cast a quizzical eye on the yield and on the dividend cover – that is how many times a company could pay a dividend from profits. A figure of 1.5 or more is acceptable. Anything below this spells risk.
Taking into account ‘a high yield, adequate cover, an acceptable share price performance and a positive market consensus on prospects’, Hunter likes British American Tobacco, which has a yield of 8.83 per cent.
He also likes HSBC which offers 7.31 per cent. Like other banking groups, HSBC will be hit by a downward move in rates as this shrinks the bank’s net interest margin – the key indicator of the profitability of lending.
But a return to the near-zero rates of the pandemic is most unlikely, and a drop in borrowing costs will limit loan defaults.
Based on this view, it may be worth looking at Barclays whose dividend yield is 3.7 per cent, Lloyds (5.06 per cent) and NatWest (5.14 per cent).
FUNDS
Checking out whether a company is being stingy or recklessly lavish with its dividends takes time, so spreading your bets in a fund or trust can make sense.
Bestinvest, Fundcalibre and Interactive Investor recommend names like Artemis Income, City of London and Murray Income (where I have a stake). These focus on FTSE 100 companies. For some exposure to small and medium-sized enterprises, the options include the WS Gresham House UK Multi Cap Income fund. Its manager Brendan Gulston says that these businesses can provide ‘a stable dividend stream’.
Mr Kipling owner Premier Foods is among the fund’s holdings. Gulston says: ‘Thanks to its powerful brand portfolio, Premier has delivered a 20 per cent compound annual increase in its dividend yield from 1p per share in the 2021 financial year to 1.729p in 2024.’
The fund also invests in Bloomsbury, the publisher of the Harry Potter books and the ‘romantasy’ best-seller House Of Flame And Shadow by Sarah J Maas. The company has more than doubled its interim dividend to 3.70p per share, up from 1.41p a year.
Gulston argues that Bloomsbury’s ‘long-term growth is underpinned by robust financial position, but also by its strategic acquisitions.’
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