Business

Yesterday’s lottery numbers as an investment

Ricky Gervais in a scene from the latest After Life series on Netflix
Ricky Gervais in a scene from the latest After Life series on Netflix Ricky Gervais in a scene from the latest After Life series on Netflix

WATCHING the latest series of After Life, and the moment Ricky Gervais manages to persuade the owner of the newspaper not to sell (sorry if I spoiled that) . . . it goes like this:

"How much would you sell it for?” . . "Half a million”. "What would you do with that”? "Buy a car”…"I’ve gotta cash in my chips and get something for my hard work sometime.”. . .

Thankfully, he decided to keep taking the income for the newspaper, otherwise that was the end of the programme.

And there is the dilemma. Producing an income from hard-earned assets.

Inflation sitting at 1.94 per cent and the best bank offering around 2.75 per cent gross is not something I would have thought possible when I was paying 16 per cent for my mortgage at 20 years old.

Moreover, how do you take an income and allow your remaining money to keep pace with the cost of living.

For example, if inflation is at 1.94 per cent and your gross is 2.75 per cent, even if you paid no tax on it, the maximum earnings is 0.81 per cent.

Naturally investors look to trusty dividends. We can debate their historic benefit, and conclude for sure they are essential, but not the tail that wags the horse.

As we mentioned last year with dividends at historic highs, care needed to be taken to ensure you weren’t buying yesterday's winning lottery numbers.

Dividends are marketed by their headline rate – the pretty one that looks more attractive than 0.81 per cent.

The headline rate is calculated by dividing the current yield by the share price.

Share prices have been battered, so a share price at £100 and dividend of £5 equals 5 per cent. The share price drops to £50, and the dividend hasn’t been readjusted so it’s still £5, but now equals 10 per cent, which is of course, yesterday’s lottery numbers.

Personally I like dividends as a form of return. A share price can fluctuate but each dividend over 20 years could have been banked, or even purchased more shares.

Dividends are still however, the tail of the investment horse. One doesn’t wag the other, and chasing a dividend because it’s high, or always been there, is not a reason to invest in a fund, or share, whose capital value is about to fall off the face of the earth.

Sustainable dividend production in conjunction with upward rising share prices is paramount.

If you have a sustainable growth, and a dividend that is dropping in nicely each year, you are in a position to decide your withdrawal levels (your income) based on what you have achieved.

If it’s solely based on dividends, your capital value (share prices of the stocks you hold) could weaken considerably, leaving you with a lower pot the following year, to take a larger withdrawal from.

This year is seeing dividends hit like never before. St James Place has cut one third of its dividend after stock market collapses hammered their funds under management.

Shell has cut its dividend by two thirds, the first time since the Second World War.

Covid, like many major impacts before it, can, and is used by some companies to dump bad news. Shell however, reduced their dividend from 47c to 16c, a move that plummeted its share price by a further 6 per cent.

Shell doesn’t see this as short term. It believes the energy cycle to be shifting significantly and believes it’s hard to see oil demand ever to reach those previous highs again. As the first of the major oil companies to drop dividends, expect more of the same.

For those thinking the oil price is an obvious trading option, Shell chief executive Ben Van Beurden made a stark claim that “we do not expect a recovery in oil prices or demand for our products in the medium term”.

Dividends from UK companies are expected to fall by up to 53 per cent in 2020, and that’s including payments already made in the first quarter.

Whether this scrapping is a positive PR plan (protecting the future of the business over rewarding shareholders) or not, remains to be seen next year, but for sure, pensioners relying on income producing assets should keep in touch with their adviser.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a query on investments or would like advice, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.