There was a time when my friends used to call me either Ginger Jeff – on account of my extraordinary hair colour – or J Squared because of my initials (Jeffrey John, for those who are interested).
But age has turned the hair more akin to strawberry blond, rendering Ginger redundant and Strawberry Blond technically correct, but a little inappropriate.
On the J Squared front, nobody has called me it for more than 40 years, since my rugby coach (a bellicose and fearsome Welshman called Hamilton Jones) used to scream at me during matches:
‘J Squared. Get down that wing. Now!’ Invariably, much to Hamilton Jones’s displeasure, I would respond by instantly dropping the ball.
Yet with creeping age, I have assumed a new title. Among friends, I am now referred to as ‘Divi Jeff’ in light of my predilection to rant and rave about the personal finance case for dividends, the income that many stock market-listed companies – the likes of AstraZeneca, BP and HSBC – pay shareholders for supporting them.
Whether it’s at a dinner party I am hosting, a barbecue I am cooking for friends, or just a quiet drink down at the local hostelry with mates, I just can’t help myself. Dividends always come into the conversation, even if all the chat prior to my ‘divi’ intervention has been about other more pressing issues – for example, the hiatus at the top of the Conservative Party, Aston Villa’s deserved promotion to the Premier League, or a discussion about the latest book we are all reading (Jane Harper’s quite brilliant The Lost Man).
“Divi Jeff, give it a rest,” they urge. Sometimes I relent, sometimes I carry on like a force of nature (by coincidence, Force of Nature is the title of Jane Harper’s second book, her first being The Dry). Divis, divis, divis.
My love of the dividend as part of good wealth management is long-standing. But in the past 10 or so years, I think the dividend has become even more mainstream. It’s a personal finance tool that many people, young and old, are now using almost as a matter of routine. Either to help build wealth in the case of the young – through its automatic reinvestment – or to supplement the income of those in part or full retirement mode.
The case for dividends has been made stronger by the low interest rate economy that has prevailed since the dreadful days of 2007 and 2008, when financial chaos was the order of the day. Although base rate, at 0.75%, is higher than it was (0.25% in the wake of the vote to leave the European Union in June 2016), savings rates remain pitifully low. If you have savings with a mainstream bank, you will be lucky to earn more than 0.2% or 0.3% interest a year on your money – a return that’s far less than the prevailing rate of inflation that continues to hover obstinately above 2%. In other words, your savings are slowly but surely being eroded by inflation.
By way of contrast, dividends from companies listed on the UK stock market are on average providing shareholders with annual income in excess of 4% – with the possibility of income growth in the future.
Of course, there are risks involved. In pursuing dividends, you expose your wealth’s value to the gyrations of the stock market, so you need to be prepared to invest long term (10 years and more).
There is also no guarantee that the annual income of 4% plus currently available from the UK stock market will be maintained in the near future. Dividends can only be paid by companies if they are profitable and are generating sufficient cash from their operations. As we all know from the news, the outlook for the UK economy and wider world economy is uncertain at best.
And companies do, from time to time, cut their dividend payments, even ones such as Vodafone that have previously been known for being shareholder friendly. It reduced its dividend for its financial year just gone by some 40% – this is after a two-decade streak of rising payments.
If you are happy to accept these risks, the best way to tap into this divi story is through an equity income investment fund or investment trust that has exposure to a portfolio of dividend-friendly companies. If you don’t want to take the income immediately, you can arrange for it to be reinvested instead – buying you yet more funds or trusts.
interactive investor, the parent company of Moneywise, has put together some model portfolios of income funds (‘active’ income and ‘low-cost’ income), details of which you can find at: ii.co.uk/model-portfolios.
The Association of Investment Companies also has a wealth of information on income investing at: theaic.co.uk. This includes trusts with long-term dividend records, in some instances going back more than 50 years.
Move over Ginger. ‘Divi Jeff’ forever.
JEFF PRESTRIDGE is the personal finance editor of The Mail on Sunday. Email him at email@example.com.