Want to earn a higher investment income? Turn to equities
UK government bond yields have joined the low rates governing the savings market. The highest you can get now is a 0.9% yield on a 30-year government. With inflation already at almost triple that value, you’ll end up losing money instead of earning a decent income. So, how can you maximise your return?
Equities could prove to be the solution. According to Link Group’s UK Dividend Monitor, UK firms have distributed £1 trillion between 2009 and June 2021. Global payouts over the same period totalled £10 trillion, based on Janus Henderson’s Global Dividend Index. Currently, the global dividend yield on equities is 2%, but the figure doubles every 12 years with profit growth.
Ben Lofthouse from Henderson International Income Trust commented that dividends are like a financial comfort blanket. Company payouts act as a protection during bear markets and enhance returns when markets are high and stagnant. Companies distributing dividends are often mature and are profitable enough to serve shareholder interests and reinvest for growth.
The pandemic forced companies to cut dividends last year to preserve cash and withstand the strained economic conditions. In the UK, the situation was worse than the rest of the world, as dividends declined three times larger. That reflected the unbalanced sector mix with many banks, mining, and oil firms driving distributions. It also brought to light the unsustainability of distributing such high dividends as it was in recent years.
In Q2 2021, UK firm’s dividends had jumped by 51.2% to £25.7 billion compared to the same period in 2020. Ethical funds returned better than non-ethical funds at an annual return of 19.87%, compared to 17.89% for non-ethical funds. Going back farther, returns on ESG funds also outpaced other funds, reporting a 254% return over the past 15 years versus 170%.
To avoid the trap of investing in seemingly attractive income companies that have no growth, you should assess a firm’s dividend cover. The measure shows the relationship between cash profits and dividends and noting if the company has enough cash to cover the payments. Lofthouse anticipates companies will resume 2019 dividend payout highs within months with fewer yield traps.
Even younger investors who care more about capital gains versus income also benefit from higher yields. They could reinvest dividends in the company, compounding their gains.
Still, equities come with higher risk, so you should seek advice to shelter your investment. Get in touch with one of the financial advisers in London to assess potential equity investments that fit your risk profile.
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