As interest rates fall, these are the steps YOU need to take to boost your income – by our investment guru ANNE ASHWORTH
Interest rates are heading downwards – to the glee of borrowers, but to the chagrin of the millions who need an income from their savings.
Following last week’s cut, the Bank of England base rate now stands at 4.25pc and is forecast to fall to 3.75pc by the end of the year.
As a result, some of the £1.9trillion that the British have stashed in bank and building society accounts is going to be looking for new homes.
Deposit rates are already being trimmed. But, by way of consolation, companies worldwide are set to distribute $1.83trillion in dividends this year, as the latest Janus Henderson index shows. This follows a record haul of $1.7trillion in 2024.
The members of the UK blue-chip FTSE 100 index are predicted to reward their investors with £83bn in dividends, according to AJ Bell. The total bounty from all companies could reach £90billion, or so the Computershare Dividend Monitor forecasts. In May alone, about £9bn will be distributed, with groups such as Aviva and Lloyds Bank paying out.
These numbers suggest that the stock market could be the way to boost the income from a chunk of your cash. This, obviously, involves a gamble if you are used to the security of deposit accounts and National Savings & Investments. But the rewards can be considerable, and there is potential for some longer-term growth, especially if you seize some of the opportunities in UK plc.
By custom, US companies are somewhat stingy towards their shareholders: the average dividend yield from Alphabet, Meta and other ’Magnificent Seven’ tech companies is about 0.40pc.
Anne Ashworth suggests creating a broad share portfolio to compensate for interest rate cuts
The Bank of England is expected to cut rates further this year, probably to 3.75pc by December
By contrast, the yield on the FTSE 100 is 3.7pc (dividend yield is calculated by dividing the share price by the dividend).
Sue Noffke, manager of the Schroder Income Growth Fund, says: ‘Other global markets are typically lower-yielding. The UK market also has an interesting mix of companies that derive approximately 75pc of their revenues from overseas.’
Intrigued by this route to improving your income? This is how to make the most of the dividend bonanza, while backing Britain, exploring Europe and venturing further afield.
THE BRITISH WAY
The growing interest in UK shares reflects the desire to diversify away from the US, a trend that is set to continue despite Wall Street’s recovery following this week’s US-China trade deal.
But James Coker of Quilter Cheviot says there’s another reason why the UK is a ‘compelling destination’.
He says: ‘Britain has more mature companies in industries like financial services, mining and oil which can deliver dividends without compromising day-to-day operations.’
Mr Coker adds: ‘UK companies may not enjoy the lofty valuations of the businesses like the Magnificent Seven titans. But this can make them more defensive at times of market turmoil.’
James Coker of Quilter says look to the UK
In recent weeks, investors have been snapping up shares in FTSE 100 stocks such as the mining giant Rio Tinto whose yield is 5.82pc, the pharmaceutical giant GSK which offers 4.81pc and HSBC with 5.67pc.
The Kepler consultancy reports that BP has been another favourite buy because it offers a yield of 6.37pc. The oil giant’s shares are recovering on rumours that it may receive a bid from none other than its longstanding rival Shell – whose yield is 4.27pc.
Kepler also highlights the popularity of the insurer Legal & General which is trading on a yield of 9.3pc.
Income-seeking investors will be hoping the share price could soon reflect the streamlining of the business under the new-ish chief executive Antonio Simoes.
Meanwhile, as Mr Coker points out, over the next three years, Legal & General means to return some 40pc of its £13.8bn market capitalisation to investors through dividends and share buybacks.
When a company buys back its own shares, this reduces the total number of shares on the market which should give a fillip to the share price and also increase the value of the dividends for each remaining share.
AJ Bell says that FTSE 100 companies had already unveiled £29bn in share buybacks by the start of this year.
More are likely to be announced, since this form of returning cash to shareholders appeals to US and other international investors, in particular. Wall Street is in the middle of a buyback boom. This trend may strengthen, which suggests that anyone who requires a regular income stream should take advantage of dividends now.
British American Tobacco may have recently bought back £900m-worth its shares, but its currently dividend yield is an eye-catching 7.88pc.
This is certainly attractive, but the company’s challenges include successfully delivering its ‘innovation package’ of smokeless products for the shift away from cigarettes and dealing with litigation in Canada over the damage to health from cigarettes.
This underlines the potential jeopardy of relying only on the better-than-average yield companies and the wisdom of spreading your bets.
THE FUND ROUTE
Such is the desirability of dividends that the funds and investment trusts that prioritise these distributions are dubbed ‘aristocrats’ and heroes. As many as 20 ‘dividend hero’ trusts have increased their dividends over at least the past 20 years. This list includes some UK trusts: City of London, Merchants, Murray Income and JP Morgan Claverhouse whose yields are 4.72pc, 5.41pc, 4.68pc and 4.87pc respectively.
These long-established names feature in my portfolio. But more UK trusts are aspiring to hero status, such as Law Debenture (3.73pc) and Dunedin Income Growth (4.76pc).
Other UK options include the Temple Bar trust with a yield of 4.07pc. Ben Yearsley of Fairview Consulting says: ‘Temple Bar’s managers are excellent. It’s dull, it’s boring, but it delivers.’
If you want more exposure to Continental Europe – a region on which Wall Street is currently keen – the SPDR S&P Euro Dividend Aristocrats fund is an option.
This tracks an index of 40 eurozone companies, including the German insurer and the French construction group Bouygues, that have increased or maintained their dividends for at least 10 years. The yield on the fund is 3.71pc.
Should you wish to throw your net wider, Mr Yearsley cites the ‘excellent long-term record’ of Artemis Global Income (yield 4.07pc) which has stakes in the German defence group Rheinmetall and the Canadian gold miner Kinross.
Jupiter Asian Income (yield 3.56p) gives you exposure to chip maker Taiwan Semiconductor Manufacturing Company and Newmont. This gold mining group may be based in Colorado, but it has operations in Australia which is part of the Asia-Pacific region. This diversity, says Mr Yearsley, provides a ‘broad spread of dividend growth.’
THE OUTLOOK
The estimates for dividends in 2025 are welcome news for those who recall the impact of the postponement or withholding of billions in payouts during the pandemic: banks and other businesses slammed on the brakes.
That mass cancellation served to remind us that dividends are not guaranteed, but also how valuable they are, which should be food for thought for those investors who tend to overlook these payouts.
If you opt to reinvest your dividends, you will be able to take advantage of compounding over the longer-term which can be a lucrative approach.
Mr Coker says: ‘Over the past two decades, UK stocks have returned just under 290pc. The capital growth element of this figure is about 90pc. This means that reinvesting dividends has accounted for more than two-thirds of the total return.’
Dividends were invented in 1602. In 2025, they are a tradition that we should celebrate.