How to earn higher yields on your investments
Low interest rates look set to continue for the foreseeable
future. Whilst this is great for borrowers, it is disastrous for investors and
people retiring on annuities.
future. Whilst this is great for borrowers, it is disastrous for investors and
people retiring on annuities.
Earning just over 1% on an ISA account It’s not even keeping
up with inflation, let alone giving you a good investment return.
up with inflation, let alone giving you a good investment return.
Even gross yields on buy-to-let properties in major cities
have fallen below 4% and in London or sometimes around 2%. That’s ‘gross’ yield
by the way, before costs such as letting charges and repairs.
have fallen below 4% and in London or sometimes around 2%. That’s ‘gross’ yield
by the way, before costs such as letting charges and repairs.
What should you the investor do to improve the yield or income
you receive on your money, particularly if you are relying on this to provide
retirement income?
you receive on your money, particularly if you are relying on this to provide
retirement income?
You can, of course, shop around for the highest rate
available on savings accounts, but this is not going to improve your overall
return by that much.
available on savings accounts, but this is not going to improve your overall
return by that much.
The Sunday Times reported this weekend that the highest headline
returns on savings accounts were offered for just 72 hours before being
withdrawn.
returns on savings accounts were offered for just 72 hours before being
withdrawn.
Investors may want to consider high yielding shares as an
alternative to deposit based investments.
alternative to deposit based investments.
Yes, there is the risk that the value of your capital can go
down as well as up, but many of these are blue-chip companies listed on the
London Stock Exchange, which have good prospects of future growth as well as
paying higher dividends.
down as well as up, but many of these are blue-chip companies listed on the
London Stock Exchange, which have good prospects of future growth as well as
paying higher dividends.
Examples of these FTSE100 index - the top 100 companies
listed on the London Stock Exchange -listed companies include the insurer Aviva
PLC, which is currently paying a dividend yield of just over 8%.
listed on the London Stock Exchange -listed companies include the insurer Aviva
PLC, which is currently paying a dividend yield of just over 8%.
The insurance company has over 30 million customers, a
market capitalisation of £14.2 billion and trades on a P/E ratio of 9.53.
market capitalisation of £14.2 billion and trades on a P/E ratio of 9.53.
As I write, the shares are trading at 374p, but have been as
high as 498p and as low as 350p in the last year.
high as 498p and as low as 350p in the last year.
Aviva is listed as a “buy” by most brokers, but could also
be affected by Brexit.
be affected by Brexit.
Shares can be held within the tax-free wrapper of an ISA,
which means that you would not pay tax on the income or growth.
which means that you would not pay tax on the income or growth.
Another example, is the world’s third largest mining
company, Rio Tinto, which has a market capitalisation of over £70 billion and
is currently paying a dividend of just over 5.5%, trading on a P/E of 10.16.
company, Rio Tinto, which has a market capitalisation of over £70 billion and
is currently paying a dividend of just over 5.5%, trading on a P/E of 10.16.
The business dates back to 1873 and earnings have gone up by
an average of 32% each year for the past five years. In August 2019, the
company announced its plans to return more than £2.8 billion to its
shareholders
an average of 32% each year for the past five years. In August 2019, the
company announced its plans to return more than £2.8 billion to its
shareholders
However, some brokers recommended selling, as its share
price is being threatened by unpredictable weather and a weakened outlook for
minerals such as iron ore.
price is being threatened by unpredictable weather and a weakened outlook for
minerals such as iron ore.
House builders Redrow PLC and Persimmon PLC have both fared well
in the last few years, especially with the push for more new homes and the introduction
of the government Help-to-Buy scheme for first time buyers.
in the last few years, especially with the push for more new homes and the introduction
of the government Help-to-Buy scheme for first time buyers.
Redrow has a market capitalisation of just over £2 billion,
trades on a P/E ratio of 6.46 and currently has a dividend yield of 5.26%.
trades on a P/E ratio of 6.46 and currently has a dividend yield of 5.26%.
The company recently reported a jump in annual profits to
£406 million for the year ended to 30th of June 2019, up 7% of the previous
year, with annual revenue rising by 10% to £2 billion. Revenue was driven by a
13% increase in legal completions to 6443 homes. There was a 2% drop in the
average selling price.
£406 million for the year ended to 30th of June 2019, up 7% of the previous
year, with annual revenue rising by 10% to £2 billion. Revenue was driven by a
13% increase in legal completions to 6443 homes. There was a 2% drop in the
average selling price.
Persimmon is currently paying a dividend yield of just over
12%! That’s a 1200% increase on what most people are getting on an ISA account.
12%! That’s a 1200% increase on what most people are getting on an ISA account.
The company has a market capitalisation of over £6 billion,
and reported a profit of £1 billion on revenues of £3 billion, yet trades on a
P/E ratio of just 6.75.
and reported a profit of £1 billion on revenues of £3 billion, yet trades on a
P/E ratio of just 6.75.
The business trades under the brand names of Persimmon,
Charles Church, Westbury partnerships and Space4.
Charles Church, Westbury partnerships and Space4.
Despite what you read in the press, around 200,000 new homes
have been built each year for the past few years in the UK. There is still
demand for property for various reasons, but builders could be dependent on
schemes like help to buy.
have been built each year for the past few years in the UK. There is still
demand for property for various reasons, but builders could be dependent on
schemes like help to buy.
As I said earlier, the price of shares can go down as well
as up and dividends and the value of your capital are not guaranteed.
as up and dividends and the value of your capital are not guaranteed.
High yielding dividend shares are generally not that
exciting in terms of capital growth. The companies are expected to grow over
the longer term, which means you can enjoy dividends and capital growth on your
investment.
exciting in terms of capital growth. The companies are expected to grow over
the longer term, which means you can enjoy dividends and capital growth on your
investment.
These are just a few examples of shares which offer dividends
(a share in the profits) of over 5% of the share price.
(a share in the profits) of over 5% of the share price.
You can do your own research online by googling high
yielding dividend shares, or look at websites such as the London stock exchange
and many other finance sites. Nowadays, we have at our fingertips real-time information
which would have previously only been available to stockbrokers and Financial
institutions. You might want to put shares on your list of companies to watch, or
‘watch list’, and wait for the price to be right or when they are on sale
during a downturn.
yielding dividend shares, or look at websites such as the London stock exchange
and many other finance sites. Nowadays, we have at our fingertips real-time information
which would have previously only been available to stockbrokers and Financial
institutions. You might want to put shares on your list of companies to watch, or
‘watch list’, and wait for the price to be right or when they are on sale
during a downturn.
As always, seek your own independent advice from an
independent financial advisor. However, the best way to invest in shares is to
learn more about it yourself, since most advisors would direct you towards a
fund (on which some can earn a commission) rather than a direct investment into
an asset such as a share or a property.
independent financial advisor. However, the best way to invest in shares is to
learn more about it yourself, since most advisors would direct you towards a
fund (on which some can earn a commission) rather than a direct investment into
an asset such as a share or a property.
You can invest in unit trusts or mutual funds, which are
collective investment funds specialising in holding income shares.
collective investment funds specialising in holding income shares.
Word of the Day
P/E ratio
Although I have spoken about this term before, I think it’s
important to repeat it here in relation to investing on the stock market.
important to repeat it here in relation to investing on the stock market.
P/E ratio is the price to earnings ratio or value in a
company that measures its current share price relative to its earnings per
share (EPS). In simple terms, it is the multiple of earnings you are paying for
the business.
company that measures its current share price relative to its earnings per
share (EPS). In simple terms, it is the multiple of earnings you are paying for
the business.
The higher the P/E ratio the higher growth investors are
anticipating in the future, although this also means that the share price is
higher right now and could be overvalued. In June 2019, the average markets P/E
ratio was between 20 and 25 times earnings.
anticipating in the future, although this also means that the share price is
higher right now and could be overvalued. In June 2019, the average markets P/E
ratio was between 20 and 25 times earnings.
Amazon.com’s P/E ratio is 76 right now, which makes it quite
an expensive buy even if investors are betting on a high in future earnings.
an expensive buy even if investors are betting on a high in future earnings.
If you wanted to buy Amazon, you would have to pay 76 times
its earnings.
its earnings.
The P/E ratio is just one measure of how investors value a
stock and should not be the only measure you use when deciding whether or not
to invest.
stock and should not be the only measure you use when deciding whether or not
to invest.
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