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Millions of us put our money into our banks’ Isa accounts – but could we end up getting more if we invested it in the banks themselves instead?
Many pay dividends that are higher than the interest we would get on cash, with the potential for capital gains as well.
With big names like HSBC looking cheap compared to the FTSE 100, here’s how you can get financial exposure in your tax-free Isa wrap before the end of this tax year, as well as which bank stocks to consider and which to avoid.
Better than a savings account: many UK banks pay dividends higher than the interest we would get on cash, with the potential for capital gains too
An unloved sector
The UK stock market has underperformed the rest of the world recently, and the financial sector is one of the cheapest corners.
A common way to value shares is to divide the profit the bank is expected to make by the company’s share price.
On this measure, the financial sector currently trades at 7.2 times this year’s expected earnings, compared to the market average of 11.
The stocks are cheap for a number of reasons, including concerns that the cost-of-living crisis could cause borrowers to default on their mortgages, and because falling bond valuations last year caused some regional banks went bankrupt, but not in Britain.
While these concerns are valid, recent positive economic news, such as lower inflation rates and the fact that we are no longer in a recession, should be reassuring to bank stock buyers.
Jason Hollands, director of investment platform BestInvest, said: ‘UK banks are well capitalized and awash with cash, so should be able to weather these headwinds.’
Choose stocks
Investors can choose to buy from a number of British banks or financial companies such as insurers. Many return a lot of money to shareholders through both dividends and share buybacks.
Barclays
Barclays shareholders have seen the shares rise 26 percent in the past twelve months.
Those who get in now will have a dividend yield of 4.6 percent, slightly lower than the best buy rates on savings accounts.
However, some experts believe the stock still has further to go.
The bank has committed to returning half of its stock market value to shareholders over the next three years in the form of dividends and share buybacks.
Richard Hunter, head of markets at investment platform Interactive Investor, believes the total amount paid out over the next three years will be £10 billion.
Despite its recent strong run, it is still the cheapest of the UK banks in terms of valuation, trading at six times earnings.
HSBC
Dividend yield enthusiasts might look at HSBC, where earnings are higher than what you could get in savings accounts at 7.9 percent.
Recent profits have been strong despite a problem with its Chinese operations that saw profits fall in the last quarter.
Lloyds
Those interested in a more domestic bank might consider Lloyds, with a dividend yield of 5.5 percent.
Hunter says the bank is “performing well in a difficult environment, with its underlying financial strength supporting progress.”
Darius McDermott, director of fund data group FundCalibre, said: ‘The business is predominantly domestic and there is less chance of something going wrong.’
NatWest
The only bank to have seen its shares fall this year is NatWest, after it cut profit forecasts due to an expected fall in interest rates and the fallout from Nigel Farage’s ‘debanking’ scandal at its Coutts subsidiary. NatWest now yields almost 7 percent.
Investors may want to wait until the summer, when the government is expected to sell its stake to private investors. A discount can be applied to convince investors to buy the shares.
Standard chartered
With a yield of 4 percent, globally focused Standard Chartered is exposed to the Chinese economy, making analysts cautious.
But Hunter believes it is “sufficiently capitalized to meet challenges.”
Others in the industry
The sector also includes what Hollands calls “a mix of exchanges, card firms, asset managers and insurers.”
Ben Ritchie, head of developed markets equities at fund management group Abrdn, sees the London Stock Exchange Group as a stock primed for growth.
Other options include insurance companies Aviva and Legal & General, which have asset management businesses that Hollands believes will benefit from rising stock markets.
Funds for finance
If you prefer to invest your Isa in funds, which can make it easier to diversify your portfolio across a range of stocks, there are several with a heavy banking and finance component.
Nearly a third of Man GLG’s Income fund is financial, and it includes HSBC, Barclays and Lloyds in the top ten, giving you good exposure to major UK banks.
Man GLG has performed well recently, rising 30 percent in 12 months.
Other options include the City of London Investment Trust, which also has a third in financial services, and the Schroder Income fund, which has around a quarter of its investments in financial services.
City of London, led by the stalwart Job Curtis, has increased its dividend for 57 years, the longest ever record of any investment trust, and currently has a yield of 5.12 per cent, more than what you’ll get with most cash Isas to get.
Please note that unlike depositing money into your bank account, the value can go down as well as up.
But over longer periods, investments tend to outperform savings, so only those who want to hold their Isa for the long term may want to look at bank shares – and also the cash Isas they offer.
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