Money

Making money

Get a greater share

To anyone living in the real world the Bank of England's interest rate rise in August should have come as no surprise - and it may well not be the last. Still, while this is bad news for the credit card generation it has some benefits for those with savings to invest

That said, savings accounts are not necessarily the best place for your money in times of rising inflation: if prices are going up at a rate of 3% a year and you are getting 5% on your savings account, you are making a real return of only 2% a year. Instead, savers might be wiser to look to the stock market and, in particular, to high-yielding shares - those that pay a greater than average dividend. The best savings accounts offer interest rates of between 4 and 5%, but 60 of the UK's top 350 companies yield more than 4.5% and some blue-chip names yield 7% plus.

Better still, these dividends are more lightly taxed than interest payments. Basic rate taxpayers pay only 10% tax on dividend income, with those on the higher rate paying 32.5%. On interest income you will pay 20% and 40% respectively.

With shares you also get the potential for capital appreciation as well as your dividends. An analysis by the London Business School of the top 100 stocks between 1953 and 2000 found that the high yielders produced an average annual total return (dividends and capital growth) of 11.5%, while the low yielders produced only 8.6%.

So which ones are worth buying? The key is to find those that are not just paying a high dividend now but are capable of continuing to do so. Tobacco firms and utilities tend to have solid businesses and pay large dividends (the market prices them at a discount as they are considered to be slow-growing businesses). Gallaher shares currently yield 4.2% and United Utilities 7.3%, for instance. It might also be worth taking a look at out-of-favour bank Lloyds TSB Group, which yields 7.5%, and brewer Scottish & Newcastle which pays out 4.3%. If you prefer to invest in funds, Neil Woodford's Invesco Perpetual Income fund and Tony Nutt's Jupiter Income fund are among the best in this area.

 

The opinions expressed are those of the author and are not held by Saga unless specifically stated.
The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.