Conal Gregory: Searching for savings scraps as company dividends are cut back

A proper return on investments is required for those who depend on it for their income, notably pensioners and accident victims. It is an incentive to save and ensure that your money is not being eroded by inflation.

Whilst the Retail Prices Index has fallen to 0.8 per cent, it was 2.6 per cent in May and even higher in April, National Savings & Investments (NS&I) have announced their Direct Saver rate will fall from one per cent to 0.15 per cent AER and the Investment Account from 0.8 per cent to 0.01 per cent from November 24.

Yet traditional bank and building society accounts are not enticing. For instant access, Coventry pays 1.05 per cent from £1 and Yorkshire Building Society 0.95 per cent on a minimum £10,000.

Fractionally more can be achieved by opting for a notice account, such as 1.1 per cent for 120 days’ notice with Aldermore Bank, owned by First Rand Group in South Africa. It offers a monthly interest option for those looking to supplement their income. The same rate but for 90 days’ notice is offered by Secure Trust Bank.

Regular saver accounts often pay more as providers like the cash flow and reliability. NatWest recently launched a Digital Regular Saver which pays 3 per cent on balances up to £1,000 (maximum £50 monthly) with unlimited withdrawals permitted.

Whilst a current account must also be running, both can be opened at the same time. West Bromwich pays a fixed two per cent (up to £100 monthly) for one year.

HSBC pays 2.75 per cent on its own Regular Saver and those offered by its two subsidiaries: Leeds-based First Direct and M&S Bank. This is for £25-250 monthly which is increased to £300 for First Direct. Current accounts must also be running and, for M&S, the switch service used.

Two fee-free current accounts pay two per cent: Nationwide (FlexDirect up to £1,500 for one year) and Virgin Money (£1,000 with no time restriction). Both come with overdraft and other facilities.

Analysis by Moneyfacts reveals that monthly credits are also available with Halifax (Reward Current), TSB (Spend & Save) and the Co-operative Bank (Everyday Rewards) provided various conditions are met. These range from maintaining sufficient daily balances to direct debit mandates.

Basic rate taxpayers (20 per cent) can earn £1,000 from savings without paying tax. For higher rate payers (40 per cent), the allowance is £500 but this is not extended to those on the additional rate (45 per cent).

Such interest can come from a wide variety of sources – from bank and building societies to credit unions and peer-to-peer lending.

Bonds, both corporate and government, qualify but dividend income from shares and funds is excluded.

Often non-high street names have to entice with a slightly higher rate. Just check with the Financial Conduct Authority’s website that it is an authorised deposit-taking firm which means up to £85,000 per individual is protected through the Financial Services Compensation Scheme.

Bonds take a number of variations. If a simple fixed rate arrangement is required, look at Atom Bank at 1.18 per cent for one year (£50 minimum), Hodge Bank at 1.25 per cent for two years (£1,000 minimum) and United Bank at 1.4 per cent for three years (£2,000 minimum).

The latter is a Pakistani commercial bank which is owned by UK-based Bestway Group.

Instead of these avenues, look to the stock market for better returns and particularly equity income funds. By sharing investments with good income payments picked by a professional manager, both risk and volatility will be reduced.

Savers should not be put off by the LF Woodford Equity Income fund where far too much money was placed in unquoted securities and £15.5m already deducted in fees for winding the business up.

Henry Wadsworth Longfellow’s “a comfortable man with dividends” is unlikely today. Few could have predicted the cancellation, cut or suspension of so many dividend payments but this has applied to 455 firms listed on the London Stock Exchange in the six months since the pandemic began.

Such lost income has occurred across the board with around half of both the FTSE100 and 250 and 139 AIM companies. Just four stocks – Aviva, Anglo-American, BP and Imperial Brands – reduced payments by around £1.5bn.

“The problems for UK companies started well before the crisis. Many firms had got into the bad habit of increasing dividends to please investors, rather than doing what was right for the company.

“Dividends should be paid out of excess profits, not from debt,” says Darius McDermott of Chelsea Financial Services.

He sees such a move as positive in the long run as it gives companies a chance to reset dividends to a more manageable and sustainable level.

McDermott warns that some sectors – notably banking, oil, real estate, leisure and retail – are unlikely to return soon to their pre-coronavirus level.

Instead such segments as insurance, mining and staples are likely to remain robust with scope to bounce back quickly.

The notable recent high payers include Diageo, GlaxoSmithKline, Legal & General and Standard Life Aberdeen.

Economists are predicting that dividends could be down by 30 per cent next year and by 15 per cent in 2022. Individual funds could perform better.

Carl Stick, who manages Rathbone Income expects dividends to be 20 per cent down this year, which is a four per cent yield. Marlborough UK Multi-Cap Income manager Sid Chand Lall also expects his fund to yield four per cent.

Schroder Personal Wealth tips both Royal London UK Equity Income and the newer GAM UK Equity Income, yielding 4.4 and 5.6 per cent respectively.

The former favours mid-caps whilst the latter highlights small caps.

Consider companies which have already reinstated dividends. They include BAE Systems, Belvoir, Bunzl, FDM, IMI, Smurfit Kappa and UDG Healthcare.

This is an opportunity to diversify income streams overseas. Whilst no country is immune to the virus, some non-UK companies have not been under the same pressure to reduce their dividend.

Asia appears to be recovering quite quickly and has a good dividend yield which is similar to the UK. In particular, Japan has a growing dividend culture. Its companies have large cash cushions.

For collectives, look at both Jupiter Asian Income and Schroder Asian Income.

In emerging countries, companies are facing less political pressure to cut dividends although such investments come at enhanced risk.

One option is the Guinness Emerging Markets Equity.

The performance of an equity income fund will dramatically depend on its structure. If it is open-ended, like a unit trust, all income has to be paid out which means very lean times in coming months.

By comparison, investment trusts can retain profits to even out dividends and ensure payments continue.