For income-seeking investors – there’s plenty more

I received a note from my bank this week reminding me that I receive 0.01% interest on the money I hold with them. I immediately decided to repaint the kitchen, buy an air fryer – people tell me I have to have one – and top up my gold holdings.

If the bank paid me 10%, I would have little interest in doing either of these things. It seems obvious. But it is worth thinking briefly about why this is the case.

It all comes down to how the interest offered to you actually represents the value placed on your time, says Edward Chancellor in his (very good) new book The price of time.

The interest I receive on my money, which I lend to the bank for its own use, should be sufficient both to compensate me for the delayed gratification that comes with not being able to use my money now and to maintain its power. of purchase.

French economist Frédéric Bastiat credited Benjamin Franklin with these good words: “Time is precious. Time is money. Time is the stuff of which all life is made. If that preciousness isn’t recognized – and at 0.01% it certainly isn’t – it’s logical to think that the cash deposit deal isn’t working for us (which isn’t the case) – and favor keeping the future in the present (using the money now) or finding a place to put it that gives it a bit more value.

This is a completely normal reaction. It looks ridiculous now (and looking at the inflation numbers it should have looked ridiculous too), but let’s not forget that in March 2020 the Bank of England cut its main interest rate to a level historic low of 0.1%. Over the following year, the amount of cash paid out in Isas cash fell significantly and the money paid out in new Isas shares and shares increased by £10 billion over the previous year.

Three-quarters of all Isa accounts in 2019-20 were subscribed to in cash. Last year, it was only two-thirds. Isa stocks and shares also accounted for 58% of the value of all Isa funds last year, down from 49%.

It will be partly about people using their free time during the pandemic to sort out their long-term finances, partly about piling up in the housing bubble of 2020-21 and partly about the introduction of the housing allowance. personal savings, which can make the money Isas feel a bit useless. But the main driver is still likely to be that 0.1%, a figure that values ​​the courage people have expressed in saving and not spending so low that it made perfect sense to refuse to the supporter.

The problem with this is that, irritated by the undervaluation of our own future, too many of us have poured money into companies whose future was rather overvalued. Instead of looking for companies that are making real money and dividends in the here and now, investors have been putting their money into growth stocks. Scottish Mortgage has consistently topped the top buys of all major UK investment platforms.

This has driven old-fashioned fund managers crazy. Throughout 2020 and 2021, I received increasingly angry messages from a retired friend. Why shouldn’t everyone who complains about performance just buy the oil companies? or Vodafone, which was trading at its lowest level in five years in the middle of last year and even after the dividend cuts it was returning 6.3%; or British American Tobacco (BAT), which regularly produced more than 7%?

This is not to say that dividend-paying stocks are a substitute for cash on deposit. Of course, they are not. (It’s a topic that could take up many columns, but the short reason is that with any equity, your capital is always very much at risk.) They’re just significantly better than non-dividend paying stocks.

Yet lessons have been learned (again – a reminder that while in all other areas learning is cumulative, in finance it is cyclical). Vodafone is up 15% since the last rant I got from my old friend. Shell is up 73% and BAT is up 27%. The Scottish mortgage is down 33%.

The good news for those of us looking for income is that there is still plenty of it. And its appeal is not just for the income itself, but for the knowledge it gives you of the business in question, in that its leaders both place some value on your capital and are able to produce the income to pay you that value.

A new report from Stifel shows 25 equity investment funds in the UK with a current yield of more than 4%. Most have a good long-term track record of dividend growth and substantial dividend reserves (money that they have accumulated through dividend payments made to the trust over the years that they can use to pay out future dividends to their shareholders and therefore regular returns if necessary) . They also regularly return to Scottish Mortgage’s former spot at the top of the platforms’ most bought fund lists.

There are a few things to watch out for. Eight trusts aim to pay out a percentage of the value of their assets each year, generally around 4%, whether they received that percentage in the form of income or capital gains.

One is Montanaro UK Smaller Cos – which has an historic dividend yield of 5.9%, largely paid out of capital rather than income. In the year ending March 2021, for example, earnings per share were 1.2p and dividend 5.5p, says Stifel.

It’s the kind of thing that, tax implications aside, matters little to anyone when capital gains are high, but can matter a lot when they’re not. In the same year, the net asset value (NAV) of the trust increased by 35%. Since then, it has fallen 5% (and is at 25% of its highs).

Some might agree with that. If you think of your investment trust portfolio as an annuity, you won’t mind depleting capital that much. Most won’t, I think.

Trusts to look into if you want stable income paid from dividends, and sometimes from income reserves, include City of London (paying 4.5% and stuck with BAT, Shell and Rio Tinto); Merchants (4.8% with a very similar portfolio); JPM Claverhouse (4.3 percent); and Lowlands (4.8 percent).

For those who want to see value outside the UK, Murray International tops the list with a 4.2% yield and now has a 17-year record of rising dividends.

A word of warning. Many of these trusts now trade at premiums to their net asset value. You pay more for the trust than for the market value of the sum of its parts. This effectively means that you place more value on the skills and of course the time of the fund manager than they charge you in management fees. It might be a perfectly valid thing to do right now – but you might as well be aware that you’re doing it. After all, the price of time matters.

Merryn Somerset Webb is editor of MoneyWeek. The opinions expressed are personal. She is a non-executive director of BlackRock Throgmorton Trust and Murray Income Trust and owns Shell.

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