Investing for Income.
Interest versus
Dividends
Investing for Income: it's all about returns!
With the Bank of England keeping interest rates at 0.5 per cent, many who are investing for income using saving accounts receive virtually no return from their savings. Currently, NO savings account pays enough interest after tax and inflation to provide any real return.
Instead, many savers are looking for alternatives to place their ‘long term’ savings. Among the few options to invest for income are dividend-paying shares.
Click Here for fund managers’ views on how to invest for income in a high inflation – low interest climate.
Investing for Income using Dividends?
Currently, there are many large companies that pay decent dividends - yielding 4 per cent or even more - compared with just 1 or 2 per cent interest on savings accounts.
Dividend yield is computed as the dividend expressed as a percentage of the share price, i.e. a company pays a dividend of 7 pence. The share price is 100 pence. The corresponding dividend yield is 7 percent.
Interest income versus Dividends?
When comparing dividend yields with interest rates, you should keep in mind, that:
- Dividends are not guaranteed
- Dividends can fluctuate in size or cut altogether, at any time
- A reduced dividend is likely followed by a fall in the company's share prices, reducing the value of your capital
Compare this to interest from a savings account:
- Interest is guaranteed (if available!)
- Unless you are saving on the basis of a fixed interest rate, interest rates can and do fluctuate or cut altogether, at any time
- Your savings, up to £50,000 per bank, are in most cases guaranteed by the Bank of England. However, as we know only to well, from the recent past, some banks needed to be saved in order not to go broke.
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Company's intention to paying dividends?
Of course, companies can go broke. Some do. Most don't.
For me, a company’s intentions and ability to pay a steady, or even increasing, dividend over time:
- Indicate a strong and profitable business
and
- Demonstrate a commitment to shareholders that is all too rare these days
and
- Represent immediate, non-refundable returns on my investment
What are we looking for?
When considering investing for income a dividend income investor is looking for high or relatively high-yielding shares.
These are likely to be high quality companies that pay good dividends in comparison to their share price and compared to other companies.
In addition to looking for a high dividend yield, many income investors, like us, are looking for a track record of regular annual dividend increases.
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Be wary of the highest yielding FTSE 100 companies
When investing for income you may come across companies with high dividend yields. Be aware, that the historic dividend yield of any company is useless from an investor's perpective if looked at on its own.
Just buying shares in companies with the highest dividend yield, without researching how safe and sustainable these dividends are, is a grave mistake. All such companies warrant further in-depth investigation
Always carefully consider whether a given company's dividend is to be maintained and how likely it will increase or cut.
WE WOULD LIKE TO POINT OUT, THAT:
1.√ the above mentioned companies' dividend yields are based on historic dividend yields*
2.√ none of the above mentioned shares are recommendations, but are solely used as examples of UK listed companies with high historic dividend yields*
3.√the price of shares and investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested
4.√where the information consists of pricing or performance data, the data contained therein has been obtained from company reports, financial reporting services, periodicals, and other sources believed reliable
5.√ data computations are not guaranteed by Early Retirement Investor.com or any of the data providers and may not be complete.
6.√*Dividend yields move up and down. As a company’s share price increases the dividend yield falls. And vice versa: if the share price falls the dividend yield increases.
Return from Investing For Income to Investing in Shares
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