10 companies to boost your income
Income-seekers have had a tough time of late. With interest rates on deposits at an all-time low, people relying on their savings for income have seen their pots shrink, and then shrink again.
To combat this malaise, many savers have ditched their deposit accounts in favour of the world of investments, which, although riskier, is a more likely way to get a decent yield.
Income-generating funds could be the answer for some investors but, for those feeling adventurous, selecting your own shares could be a good option.
Darius McDermott, managing director of Chelsea Financial Services, says: "Over the very long term, dividends - the regular income you may receive from the companies you invest in - makes up two-thirds of total returns from UK shares." Companies that pay a decent dividend income also tend to be relatively well-established and sensibly run, so are less risky.
To help you on your way we've asked some experts for their top 10 income-paying ideas.
Mobile phones have become an everyday necessity, and if people have to make cuts it seems they will do so in other areas of their personal budget. Vodafone is a good choice in this market, says Graham Spooner, investment analyst at The Share Centre.
It's a favourite among income-seekers but also offers good long-term growth potential. It is currently yielding about 7.1% – and has managed to grow the dividend by 50% in the past year.
Its share price has struggled recently, partly because its operations in Spain and Italy have been having a tough time, but as Gervais Williams, manager of the MAM Acuim Multi Cap Income fund, points out, that's a good buying opportunity for a sound investment.
Unilever products are scattered through everyday home life, with products ranging from Ben & Jerry's ice cream to Cif cleaner. It's a favourite share of Phil Wong, a stockbroker at Redmayne Bentley, as it offers both income and growth potential.
Wong points out that after a long, rather dull period, the Unilever management seems focused on both controlling costs and, at the same time, accelerating its businesses.
"Recently, Unilever has been much more proactive in developing its home and personal care business, rather than simply harvesting its long-term presence in attractive and growing emerging markets. The concerted effort to grow this business is likely to translate into enhanced profit margins and cashfl ows over the longer term, and could lead to a growing dividend over time," he says.
The current yield stands at 3.6%.
Drug giant Glaxo is chosen by Spooner for its 5.2% yield and safe, defensive qualities. Not only that, but the company's future looks interesting.
"It's building increasing exposure in emerging markets, diversifying into areas such as consumer healthcare, and there are various new products in the pipeline - analysts are getting excited about a future cancer vaccine and a heart disease drug," he says.
Last year was a good one for the shares after a long difficult period, but 2012's market rally has meant many investors are now interested in racier 'cyclical' stocks likely to zoom ahead as the economy strengthens, so the Glaxo share price has fallen. That could mean a good buying opportunity for "defensively minded, long-term investors", says Spooner.
4. ROYAL DUTCH SHELL
As anyone who has filled up on the forecourt knows, petrol prices have been rising. That may not be good for car owners but, as Redmayne's Wong points out, it's very helpful for Shell, underpinning its fi nancial strength. Shell is indeed looking attractive on its current valuation, with a price to earnings (p/e) ratio of 7.9 x earnings and a yield of 4.6%.
Spooner agrees. "Shell's large new projects in Canada (oil sands) and Qatar (liquid natural gas) are set to significantly boost an already impressive cashflow and earnings. As a result, the dividend is set to rise in 2012," he says.
"Medium-risk investors who are looking for a reasonable yield and potential for long-term growth should be buying."
5. UNITED UTILITIES
This water company is about as solid and dependable as income investors can hope to find. Water prices are linked to the retail prices index so the group can promise that dividends will grow by 2% above inflation every year until 2015 - perfect for a steady, rising income stream. The yield currently stands at 5.2%.
United Utilities believes it's well positioned to thrive, with ongoing efficiency plans in place and low debt costs. As Spooner observes: "A defensive sector share geared to income stands out like a powerful lighthouse in the continuing economic uncertainty."
Some commentators believe the banking sector remains relatively risky and that investors should hold back. But for Kevin Murphy, co-manager of the Schroder Income fund, Barclays is good value and has a big capital buffer that helps reduce risk. It also posted strong profit growth in the last full-year results.
"Barclays may remain subject to market volatility," he says, however, given continued profit growth, improving balance sheets and low valuations, he feels there's "enormous potential to deliver significant capital and dividend growth for investors willing to be long-term".
7. SMITHS NEWS
In the face of declining demand for physical newspapers, Smiths News, the UK's leading newspaper and magazine distributor, is repositioning itself, with a shift towards digital media and the acquisition last year of book wholesaler Bertrams. A third of profits are expected to be from non-newspaper business within the next three years.
"The management team was recently described by an analyst as 'strong', which is just as well, given the likelihood that the business will be very different in five to 10 years' time," Spooner says. It's a relatively risky proposition but, with a yield of almost 9%, it's an interesting idea for more adventurous income-seekers.
Perhaps surprisingly, cinema-going has thrived in the recession. Cineworld, one of the biggest UK chains, had a successful 2011 and is growing, with the opening of new cinemas around the UK and plans for a Cineworld loyalty card.
"The company is currently in the small-cap index but, if it carries on the way it's going, it will move up into the mid-caps before long," says Williams. It's yielding a healthy 5.4% and on a p/e ratio of 10.7 x this year he believes the shares are not overpriced.
9. St IVES
This printer may not be a household name but its products are likely to be familiar as it has expanded into 'point of sale' supermarket displays. Williams says the book-printing side of the market has held up surprisingly well in the face of ebooks.
"The company has really moved with the times – but the market has not yet picked it up," says Williams. That's reflected in a p/e ratio of 5.6 x and a 6.8% yield.
10. TAYLOR WIMPEY
Murphy likes housebuilder Taylor Wimpey, which has performed well recently. "It has strengthened its balance sheet over the past two years, and intends to resume dividend payments for the first time since 2007," he says. A yield of 2.3% is forecast for 2013.
He points out that the management's focus on profit margins rather than sheer volume of new homes enabled the business to deliver a profit in 2011, while the strength of the balance sheet provides a margin of safety should market conditions deteriorate. This could be one to hold for bullish investors looking for future dividend growth.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.