How to earn up to 500% higher yields on your investments without high risks
Low interest rates look set to continue for the foreseeable future. Whilst this is great for borrowers, it is disastrous for investors and people retiring on annuities.
Earning just over 1% on an ISA account It’s not even keeping up with inflation, let alone giving you a good investment return.
Even gross yields on buy-to-let properties in major cities have fallen below 4% and in London or sometimes around 2%. That’s ‘gross’ yield by the way, before costs such as letting charges and repairs.
What should you the investor do to improve the yield or income you receive on your money, particularly if you are relying on this to provide retirement income?
You can, of course, shop around for the highest rate available on savings accounts, but this is not going to improve your overall return by that much.
The Sunday Times reported this weekend that the highest headline returns on savings accounts were offered for just 72 hours before being withdrawn.
Investors may want to consider high yielding shares as an alternative to deposit based investments.
Yes, there is the risk that the value of your capital can go down as well as up, but many of these are blue-chip companies listed on the London Stock Exchange, which have good prospects of future growth as well as paying higher dividends.
Examples of these FTSE100 index – the top 100 companies listed on the London Stock Exchange -listed companies include the insurer Aviva PLC, which is currently paying a dividend yield of just over 8%.
The insurance company has over 30 million customers, a market capitalisation of £14.2 billion and trades on a P/E ratio of 9.53.
As I write, the shares are trading at 374p, but have been as high as 498p and as low as 350p in the last year.
Aviva is listed as a “buy” by most brokers, but could also be affected by Brexit.
Shares can be held within the tax-free wrapper of an ISA, which means that you would not pay tax on the income or growth.
Another example, is the world’s third largest mining company, Rio Tinto, which has a market capitalisation of over £70 billion and is currently paying a dividend of just over 5.5%, trading on a P/E of 10.16.
The business dates back to 1873 and earnings have gone up by an average of 32% each year for the past five years. In August 2019, the company announced its plans to return more than £2.8 billion to its shareholders
However, some brokers recommended selling, as its share price is being threatened by unpredictable weather and a weakened outlook for minerals such as iron ore.
House builders Redrow PLC and Persimmon PLC have both fared well in the last few years, especially with the push for more new homes and the introduction of the government Help-to-Buy scheme for first time buyers.
Redrow has a market capitalisation of just over £2 billion, trades on a P/E ratio of 6.46 and currently has a dividend yield of 5.26%.
The company recently reported a jump in annual profits to £406 million for the year ended to 30th of June 2019, up 7% of the previous year, with annual revenue rising by 10% to £2 billion. Revenue was driven by a 13% increase in legal completions to 6443 homes. There was a 2% drop in the average selling price.
Persimmon is currently paying a dividend yield of just over 12%! That’s a 1200% increase on what most people are getting on an ISA account.
The company has a market capitalisation of over £6 billion, and reported a profit of £1 billion on revenues of £3 billion, yet trades on a P/E ratio of just 6.75.
The business trades under the brand names of Persimmon, Charles Church, Westbury partnerships and Space4.
Despite what you read in the press, around 200,000 new homes have been built each year for the past few years in the UK. There is still demand for property for various reasons, but builders could be dependent on schemes like help to buy.
As I said earlier, the price of shares can go down as well as up and dividends and the value of your capital are not guaranteed.
High yielding dividend shares are generally not that exciting in terms of capital growth. The companies are expected to grow over the longer term, which means you can enjoy dividends and capital growth on your investment.
These are just a few examples of shares which offer dividends (a share in the profits) of over 5% of the share price.
You can do your own research online by googling high yielding dividend shares, or look at websites such as the London stock exchange and many other finance sites. Nowadays, we have at our fingertips real-time information which would have previously only been available to stockbrokers and Financial institutions. You might want to put shares on your list of companies to watch, or ‘watch list’, and wait for the price to be right or when they are on sale during a downturn.
As always, seek your own independent advice from an independent financial advisor. However, the best way to invest in shares is to learn more about it yourself, since most advisors would direct you towards a fund (on which some can earn a commission) rather than a direct investment into an asset such as a share or a property.
You can invest in unit trusts or mutual funds, which are collective investment funds specialising in holding income shares.
Word of the Day
Although I have spoken about this term before, I think it’s important to repeat it here in relation to investing on the stock market.
P/E ratio is the price to earnings ratio or value in a company that measures its current share price relative to its earnings per share (EPS). In simple terms, it is the multiple of earnings you are paying for the business.
The higher the P/E ratio the higher growth investors are anticipating in the future, although this also means that the share price is higher right now and could be overvalued. In June 2019, the average markets P/E ratio was between 20 and 25 times earnings.
Amazon.com’s P/E ratio is 76 right now, which makes it quite an expensive buy even if investors are betting on a high in future earnings.
If you wanted to buy Amazon, you would have to pay 76 times its earnings.
The P/E ratio is just one measure of how investors value a stock and should not be the only measure you use when deciding whether or not to invest.
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