I had a note from my bank this week reminding me that I receive interest of 0.01% on the cash I hold with them. I immediately resolved to paint the kitchen, buy an air fryer (people keep telling me I must have one) and top up my gold holdings.
If the bank paid me 10% I would have little interest in doing any of these things. This sounds obvious, but it is worth briefly thinking about why.
It all comes down to the way in which the interest you are offered represents the value attributed to your time, says Edward Chancellor in his (very good) new book The Price of Time.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The interest I am paid on my money, which I am lending to the bank for its own use, should be enough both to compensate me for the delayed gratification that comes with not being able to use my cash now, and to maintain its purchasing power.
Savings accounts just aren’t working any more
French economist Frédéric Bastiat credited Benjamin Franklin with the bons mots: “Time is precious. Time is money. Time is the stuff of which all life is made.” If that preciousness isn’t recognised – and at 0.01% it most certainly is not – it makes sense to feel like the cash-on-deposit deal isn’t working for us (which it is not) – and to favour keeping the future in the present (using the money now) or looking for a place to put it that attributes a bit more value to it.
This is a totally normal reaction. It seems ridiculous now (and looking at the inflation numbers it should have seemed ridiculous then too) but let’s not forget that in March 2020 the Bank of England cut its main interest rate to an all-time low of 0.1%. Over the following year the amount of cash paid into cash Isas fell substantially, and the money paid into new stocks and shares Isas rose by £10bn on the previous year.
Three-quarters of all Isa accounts in 2019-2020 were subscribed to in cash. Last year it was down to two-thirds. Stocks and shares Isas also made up 58% of the value of all Isa funds last year – up from 49%.
This will be partly about people using their spare time in the pandemic to sort out their long-term finances, partly about piling into the building bubble of 2020-2021, and partly about the introduction of the personal savings allowance, which can make cash Isas feel a bit pointless. But the main driver is still likely to be that 0.1%, a number that it made complete sense to refuse to put up with.
The problem with this is that, irritated by our own futures being undervalued, too many of us poured cash into companies whose futures were rather overvalued. Instead of looking for companies throwing off real cash and dividends in the here and now, investors stuck their money in growth stocks – Scottish Mortgage, for example, regularly topped the leading buys of every big UK investment platform.
This maddened old-fashioned fund managers. All the way through 2020 and 2021 I received increasingly infuriated messages from a retired friend. Why would all those complaining about yield not just buy the oil companies; or Vodafone, which was trading at a five-year low in the middle of last year and even after dividend cuts was yielding 6.3%; or British American Tobacco (BAT), which was regularly yielding more than 7%?
This is not to suggest that dividend-paying stocks are a substitute for cash on deposit; of course they are not (this is a subject that could take up many columns but the short reason is that with any equity your capital is always very much at risk), they are just a significantly better bet than non dividend-paying stocks.
Still, lessons have been learnt (again – a reminder that while in all other areas learning is cumulative, in finance it is cyclical). Vodafone is up by 15% since the last rant I received from my old friend; Shell is up by 73% and BAT by 27%; Scottish Mortgage is down by 33%.
What to buy for income
The good news for those of us looking for income is that there is still plenty of it about. And its appeal is not just for the income itself but for the knowledge it gives you about the company in question, in that its managers both attribute some value to your capital and are capable of producing the income to pay that value to you.
A new report from Stifel points to 25 equity investment trusts in the UK with a current yield of more than 4%. Most have a good long-term record of delivering dividend growth and substantial dividend reserves (money they have accumulated from dividend payments made to the trust over the years and can use to pay out future dividends to their shareholders and hence smooth returns if need be). They are also regularly turning up in Scottish Mortgage’s old place at the top of the platforms’ most-bought funds lists.
There are a few things to look out for. Eight trusts aim to pay out a percentage of their asset value every year, usually in the region of 4%, regardless of whether they have received that percentage as income or as capital gain.
One is Montanaro UK Smaller Companies (LSE: MTU) – which has a 5.9% historic dividend yield, largely paid out of capital rather than income. In the year to the end of March 2021, for example, revenue per share was 1.2p and the dividend 5.5p, says Stifel.
That’s the kind of thing that – tax implications aside – matters little to anyone when capital gains are high but might matter much when they are not. In the same year the trust’s net asset value (NAV) rose 35%. Since then it has fallen 5% (and is 25% from its highs).
Some might be fine with that – if you are looking at your investment trust portfolio as an annuity, you won’t mind running down capital to such an extent. Most will not be fine with it, I think.
Trusts to look at if you want a steady income paid out of dividends, and occasionally out of revenue reserves, include City of London (LSE: CTY) (paying 4.5% and jammed with the likes of BAT, Shell and Rio Tinto); Merchants (LSE: MRCH) (4.8% with a very similar portfolio); JP Morgan Claverhouse (LSE: JCH) (4.3%); and Lowland (LSE: LWI) (4.8%).
For those wanting to see value outside the UK, Murray International (LSE: MYI) makes the list with a yield of 4.2% and now has a 17-year record of rising dividends.
A word of warning: many of these trusts now trade on premiums to their NAV. You are paying more for the trust than for the market value of the sum of its parts.
That effectively means you are attributing more value to the skills and of course the time of the fund manager than they are charging you in management fees. That may be an entirely valid thing to do at the moment – but you might as well be aware that you are doing it. After all, the price of time matters.
• This article was first published in the Financial Times
• Merryn Somerset Webb holds shares in Shell.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in
Tips Investors put Scottish Mortgage Investment Trust back on top, and India is the new investment hotspot - We look at what investors have been adding to their portfolios in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published