Part of the problem is that paying for Christmas can absorb so much of your spare cash. Unless you’re lucky enough to get a chunky Christmas bonus, that means saving elsewhere in January. However, the right investments can help. Invest well, and you can secure a Christmas bonus without having to suck up to your boss.
December is a bumper month for dividend payments. FTSE 100 giants such as Unilever, HSBC, Shell, BP and Imperial Brands all pay dividends in December. Those dividends can be a chunky share of your investment – the dividend yield for HSBC is currently 6.4%, while it is 4.3% for Shell and 5.9% for Imperial Brands.
However, picking individual stocks can be difficult and risky, but – helpfully – a lot of equity income funds also pay their dividends in December, alongside another payment in June. The Artemis Income Fund, for example, has a current yield of 3.8%.
Murray Income Trust pays four dividends per year, with the final one on 12 December. Its dividend yield is an impressive 4.7%. Schroder Income Growth pays its dividend in January – which may help deflect from the post-Christmas gloom. Its yield is 5%.
Dividends are an underrated part of investing, particularly in the UK. The UK remains the highest paying major market in the world. The FTSE 100 celebrated its 40th birthday this year, and while its capital performance doesn’t look great compared to its peers, dividends give it a real boost. Since the turn of the century, the FTSE 100 has risen by just 0.4% per year on average, but that rises to 4.1% with dividends reinvested.
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Investors don’t have to stick to the UK. The importance of dividends is a global phenomenon.
Helge Skibeli, manager of the JPM Global Equity Income Fund, said: “The longer you invest, the more important dividends become, and looking back on the last few decades, around 55% of market returns since 1987 to the end of 2023 are from reinvested dividends.”
Yields aren’t quite as high in global equity markets; the JPM Global Equity Income Fund has a yield of 2.1%. However, investors have had better capital performance from global funds than domestic UK funds in recent years.
The US technology stocks may have grabbed all the headlines (and investors’ capital) in recent years, but Skibeli believes that dividend strategies may prove a sound investment from here, saying: “Global equities are now on the cusp of a remarkable period of dividend growth, with not just a cyclical upswing in payouts, but structurally higher dividend momentum. Over the last 20 years, global dividends per share have grown at 5.6% annual rate, but looking forward, our analysts forecast this to accelerate to 7.6%.”
She said that dividend payout ratios – the share of profits companies pay out as dividends – are now close to 25-year lows, with room for expansion. The universe of dividend stocks is expanding, with even big tech giants such as Meta, Alphabet and Salesforce now paying dividends.
The cash conundrum
There will be people who would rather have their savings in a bank account. That way, you can have it whenever you want and the top-paying cash accounts still pay 4.5-5%. However, there are a number of problems with this – first, you won’t be protected against inflation, so if you’d put money in at the start of the year, your purchasing power would be about 3% less than it was. Fewer Christmas pressies all round.
Also, there is no possibility of growing the capital. Your £100 will stay £100. Now, that may be just the way you like it. But with the Artemis Income Fund, you’d have grown your capital by 3.03% per year over the past five years, in the JPM Global Equity Income Fund, by 9.95%. That pays for a lot of Christmases.
The final problem is that interest rates are falling. Unless you lock in a high rate today, you may find that you are getting less and less every time the Bank of England cuts rates. Dividends should grow over time as companies make higher profits. That means your income should keep pace with inflation and may even grow ahead of inflation – meaning an even better Christmas next year.
It is worth considering this when you’re making your ISA investment. That way, next year, Christmas may leave you fatter and grumpier – some things are inevitable – but at least you won’t be poorer.
Darius McDermott, managing director of FundCalibre and Chelsea Financial Services
