FTSE companies salvation for savers as saving rates could be cut due to low inflation

THE outlook for savers is bleaker than ever as hopes of an interest rate hike fade yet again.

Offshore drilling platform POLARIS

Investing in companies such as Shell could see savers reap the rewards of dividends

With CPI infltion at an all-time low of 0.3 per cent, the Bank of England may even cut base rates below today’s 0.5 per cent in a bid to fend off deflation.

If it does, savings rates will plunge to new lows. However there is one bright spot, if you are willing to take on a little more risk.

Household name FTSE 100 companies such as oil giants BP and Royal Dutch Shell, pharmaceutical company GlaxoSmithKline and global mobile phone player Vodafone are paying income of around 5 per cent to 6 per cent a year.

This income is in the form of dividends, quarterly or half-yearly payouts to shareholders as a reward for holding the company’s shares.

Many retired people rely on this regular income stream to top up their pension.

But if you reinvest the dividends instead, using them to buy more of the company’s stock, they can really turbo-charge your total returns.

Ordinary savers often forget the power of dividend income and focus exclusively on earning capital growth from a rising share price.

Yet in the longer run, roughly half your total returns from investing in the stock market will come from dividends, providing you reinvest them back into the stock to generate further growth.

While the FTSE 100 is still just below its all-time high of 6930, which it hit more than 15 years ago on Millennium Eve 1999, it is a more positive story once you include dividend income.

Laith Khalaf, senior analyst at IFAs Hargreaves Lansdown, says: “The FTSE 100 total return index, which includes dividends, is now 66 per cent above its December 1999 level.

“This tells us in a nutshell what a huge difference reinvested dividends can have.”

The FTSE 100 total return index, which includes dividends, is now 66 per cent above its December 1999 level. “This tells us in a nutshell what a huge difference reinvested dividends can have

Laith Khalaf, senior analyst at IFAs Hargreaves Lansdown

It explains why investors have still made money from the stock market, even though the headline number on the FTSE 100 is still slightly lower than at the start of the Millennium.

Buying individual company stocks is risky as even dominant household names can come unstuck.

For instance BP dropped its dividend following the Gulf of Mexico oil spill, although it now yields 5.7 per cent, Lloyds Banking Group and Royal Bank of Scotland halted theirs after the financial crisis and have yet to restart them, while supermarket giant Tesco saw its share price collapse last year and cut its dividend by 75 per cent.

Last week British Gas owner Centrica said it would cut its dividend after a sharp drop in profits.

On the other hand, many firms have increased their dividends year after year, notably Royal Dutch Shell, which now yields more than 5.5 per cent.

The big utilities are lower risk stocks , with Scottish & Southern Energy yielding an electric 5.6 per cent and National Grid yielding 4.7 per cent.

Pharmaceutical company GSK is another solid dividend payer, returning a healthy 5.1 per cent, while Vodafone’s numbers stack up at 4.8 per cent.

You can spread your risk by investing in an equity income fund that targets a spread of UK blue-chip stocks like these.

By investing in between 30 and 50 companies, they reduce the damage if one or two firms hit hard times.

Gill Hutchison, head of investment research at City Financial, tips Rathbone Equity Income, whose manager Carl Stick adopts a low-risk approach.

“His desire to avoid a permanent loss of capital attracts him to companies whose stock prices offer a large margin of safety,” she says.

The fund, which invests in stocks such as HSBC, drugs company AstraZeneca, mining giant Rio Tinto and British American Tobacco, returned 10 per cent over the past year, and 90 per cent over five years through growth and dividends, which is a dramatically better return than cash.

Threadneedle UK Equity Income is another highly-respected fund, which grew 7 per cent over the past year, and 95 per cent over five years.

Investors have also poured into CF Woodford Equity Income, launched recently by Neil Woodford, the most renowned equity income manager of all.

He has quickly justified his reputation, returning 12 per cent in the first six months, double the average UK equity income fund.

Talib Sheikh, fund manager at JPM Multi-Asset Income, says US and European stocks are also worth a look.

“As global growth strengthens, this should support shares.

Despite Europe’s troubles, it is possible to generate a 4.5 per cent yield, which looks compelling given the low returns on bonds and fi xed interest.”

Justin Modray at Candid Financial Advice says: “As ever with shares, past performance is no guarantee of future returns, but equity income is one of the more solid investment fund sectors.”

Better still, you can take your income and growth tax efficiently by popping your funds or shares inside your annual individual savings account (Isa) allowance.

You can split this year’s £15,000 Isa allowance between cash and equities, but with the average cash Isa paying just 1.44 per cent, growing numbers of disillusioned savers are deciding the rewards of equity income more than outweigh the risks.

Modray says: “You can reduce the dangers of getting caught out in a market crash by drip-feeding your money into a fund, rather than paying in a large lump sum.

You can usually invest from as little as £50 a month.”

Investing in stocks may seem more risky and you should look to invest for at least five years, preferably longer.

But it is important to remember that now, cash guarantees only that you will get a near-zero return on your money.

Sylvia Waycot, editor of MoneyFacts, says: “If you put £10,000 in the average savings account five years ago, it would have the spending power, after infl ation of just £8,769 today, a fall of more than 12 per cent.”

By contrast, dividends have given investors far richer rewards.

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