Table of Contents
Will they or won’t they? That is the question many are asking about the members of the Bank of England’s Monetary Policy Committee (MPC), which is responsible for setting interest rates.
Will they order one or two more cuts this year and act as early as next month, following the favourable economic figures this week?
But while lower rates are a boon for borrowers, millions of people are wondering how they will make ends meet.
Banks are already cutting their yields and the National Savings & Investments has exceeded the Treasury’s funding target. Premium bonds and other schemes could soon pay less.
But if you want to boost your income, now might be the time to explore the stock markets. Share prices have recovered from the recent turmoil. The FTSE 100 is up 8% since the start of the year and the US S&P 500 is up 17%.
Vanguard: If you want to improve your income, this could be the time to explore the stock markets
Duncan Lamont of asset manager Schroders highlights the benefits of equities: “As the data from 1926 to 2023 illustrates, equities have been less risky than cash in delivering inflation-beating returns over the long term.”
In the second quarter, British corporate dividends rose 11.2 percent to a record £36.7 billion.
Meanwhile, investment platform AJ Bell’s Dividend Monitor shows FTSE 100 companies will pay out £78.6bn this year and £83.9bn in 2025.
If you want some of this loot, here are the routes to explore.
ACTIONS
The new focus on dividends is illustrated by a 14 percent jump this week in shares of insurer Admiral, which owns Confused.com.
Admiral chief executive Milena Mondini de Focatiis announced a rebound in customer numbers and profits, but the City was almost more excited by the more generous-than-expected dividend.
Admiral’s dividend yield is 4.93 percent (this figure is calculated by dividing the dividend by the share price). The average yield for the FTSE 100 index is 3.6 percent.
Many companies are more generous, such as telecoms giant BT with 5.58 percent and tobacco group Imperial Brands with 7.14 percent.
However, investors should be cautious because yields rise as the share price falls, which can spell trouble.
For example, the yield on shares of British fashion house Burberry is an attractive 9.15 percent.
But the embattled company suspended the dividend last month while replacing its chief executive.
Telecoms group Vodafone’s yield is 10.63 percent, but payments will be halved to fund spending on mobile networks.
Richard Hunter of brokerage Interactive Investor suggests keeping a close eye on dividend yield and coverage – the number of times a company could pay a dividend from earnings. A figure of 1.5 or more is acceptable. Anything below this level is risky.
Given “high yield, adequate coverage, decent share price performance and a positive market consensus on the outlook,” Hunter likes British American Tobacco, which has a yield of 8.83 percent.
He also likes HSBC, which offers an interest rate of 7.31 percent. Like other banking groups, HSBC will be affected by a fall in rates, as this reduces the bank’s net interest margin, the key indicator of lending profitability.
But a return to the near-zero rates of the pandemic is highly unlikely, and a drop in borrowing costs will limit loan defaults.
From this perspective, 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
Finding out whether a company is being stingy or recklessly generous with its dividends takes time, so spreading your bets across a fund or trust can make sense.
Bestinvest, Fundcalibre and Interactive Investor recommend names such as Artemis Income, City of London and Murray Income (where I have a stake). These focus on companies in the FTSE 100 index. For some exposure to small and medium-sized companies, options include the WS Gresham House UK Multi Cap Income fund. Its manager, Brendan Gulston, says these companies can provide “a stable dividend stream”.
Premier Foods, the owner of Mr Kipling, is among the fund’s holdings. Mr Gulston says: “Thanks to its strong portfolio of brands, Premier has achieved a 20% compound annual increase in its dividend yield, from 1p per share in FY21 to 1,729p in 2024.”
The fund also invests in Bloomsbury, the publisher of the Harry Potter books and Sarah J. Maas’s best-selling romance novel House Of Flame And Shadow. 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 a strong financial position, but also by its strategic acquisitions.”
DIY INVESTMENT PLATFORMS
AJ Bell
AJ Bell
Easy investment and ready-to-use portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free investment ideas and fund trading
interactive investor
interactive investor
Flat rate investing from £4.99 per month
Saxo
Saxo
Get £200 back in trading commissions
Trade 212
Trade 212
Free treatment and no commissions per account
Affiliate links: If you purchase a product This is Money may earn a commission. These offers are chosen by our editorial team as we believe they are worth highlighting. This does not affect our editorial independence.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationships to affect our editorial independence.