Some of our clients have a proportion of their income made up of dividends from companies they invest in. Dividends fluctuate and vary from company to company, depending on their profits and how much of this they pass to shareholders.
In this article, our financial planning team at Vesta Wealth offers this overview of dividend investing. We share some thoughts on how yields have changed and the lessons that investors can draw insights from. We hope you find this article useful and invite any questions you may have about how this could affect your financial plan, via:
t: 01228 210 137
e: [email protected]
Dividend investing and yields in 2020
If a company is paying dividends, they are usually paid to shareholders from excess profits, typically four times a year. Although many companies may have a long history of paying dividends, as they are fluctuating in nature and not guaranteed, this generally makes them unsuitable for use as your only source of income, unless you happen to have additional significant capital on which to draw to make up any shortfall.
Dividend investing gained popularity with some younger people due to the rise of the FIRE movement (financial independence retire early), a philosophy which argues that it might be possible to live indefinitely from a portfolio of shares producing dividends. Whilst this sounds interesting as an idea, there are many potential pitfalls, and we would urge you to discuss this with your Financial Planner.
In particular, dividend investing only works so long as companies are prepared to pay dividends at a sufficiently high and predictable rate. Since these derive from company profits, it follows that dividends are likely to be squeezed or even stopped if profits are reduced or suspended, such as during a recession. In 2020, this is exactly what has happened to many UK companies, as they held onto cash reserves rather than pay them to shareholders. In April, for instance, when lockdowns in the developed world started coming into full force, many UK listed companies cut their dividends dramatically. Royal Dutch Shell reduced theirs by 66% (having previously been the highest FTSE-100 dividend payer in 2019), whilst the UK’s major banks (including Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered) all suspended paying dividends.
The importance of diversification
These issues illustrate the importance of having a range of income sources, especially for those in retirement. Options for generating a regular income to cover your expenses might include:
- Your state pension. For those of state pension age in 2020-21, the full new state pension can grant you up to £175.20 per week (or £9,110.40 per year). At present, this is linked to inflation – allowing you to retain its value as the cost of living rises – and the payments will not fluctuate due to volatility in the stock markets. Your state pension is payable for life.
- Rental income. If you own other residential properties in addition to your home, then it is also possible to generate a monthly income from your tenants. The yields are likely to be higher if these properties are fully paid off (i.e. no mortgage).
- Fixed-income assets. Perhaps the most well-known type of investment here are bond investments. These investments act like loans, where you (the investor) hand capital to a government or company on the promise of eventual repayment with interest. Bonds are often an important part of an investment strategy within a retirement portfolio, as they tend to come with lower risk and volatility – allowing for greater capital preservation.
- Growth-focused equities. Dividends are not the only way to make an investment return from companies. You can also choose to buy shares (i.e. through a fund) in companies which are expected to increase their earnings at an above-average rate. Assuming this occurs, you can later sell some of these shares at a profit, taking some of the returns as an income or perhaps re-investing them.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.