Low interest rates are with us for the long term. That’s the message the world’s central bankers are currently sending – loud and clear – to the world’s savers.
Late last year the US Federal Reserve raised interest rates a tiny bit and suggested they would do so again. Now with the global economy looking even more miserable than usual, they are backing away from the idea.
Read Annie Shaw's guide to common investment mistakes.
In the UK we can be pretty sure there will be no rate rise this year and in large parts of the developed world (Japan, Denmark, Sweden, Switzerland) the central bank interest rate is negative: commercial banks have to pay to deposit money with their central bank.
If this sounds nuts, that’s because it is. The idea that anyone might have to pay interest on their deposits or savings rather than receive interest on them is a total reversal of the natural financial order!
All this creates a serious problem for anyone wanting to live off the returns on cash savings: there are no returns on cash savings – 1.5% is about as good as it gets.
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What are savers to do?
This is the question I am asked most often at the moment and the one that I find the hardest to answer. The truth is that there is nothing you can do to increase the rate of return on your money that doesn’t involve taking more risk than you take with a plain old deposit account.
However, if you are really after a long-term income (and don’t mind some volatility with your capital along the way) you might look at some of the UK’s income-oriented investment trusts.
One of the nice things about investment trusts is that they don’t have to pay out all the dividend income they receive from the firms in their portfolio every year – they can hold some of it back as ‘retained income’ so they have something to pay out even in a bad year.
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They can also pay their investors an income out of capital if they don’t receive enough dividend income themselves. You might think that sounds slightly wrong (you are effectively being paid a little of your own capital back as income) but if what you are after is steady retirement income year after year, it does make sense.
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Where should you start?
Troy Income & Growth is a very conservatively run trust (its managers really hate losing money). It invests primarily in firms that have a record of strong dividend growth, something that means it has been able to keep growing its own dividend well. It currently yields 3.4%.
The City of London Investment Trust is also good: it has increased its dividend every year since 1966 and even in today’s low-yield environment it is yielding 4.3%.
Finally, for some international exposure look at The Bankers Investment Trust. It has a slightly lower yield of 2.9% but also an excellent record of increasing its dividend above inflation.
Investing in these trusts is more risky than holding cash, but they might also be more financially satisfying in the long term!
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