Don’t miss out on this record payout from Footsie giants

Who needs dividends when suddenly there are other ways to earn a decent income from your savings

Next month, National Savings & Investments will increase the premium percentage for Premium Bonds to 3.3 percent.

A few easy-to-access accounts offer 3 per cent, and First Direct, a division of HSBC, has a regular savings account that pays out 7 per cent (don’t get too excited – the maximum you can contribute each month is £300).

Deposit rates have been low for so long that these returns may seem like the ideal solution – a way for those who need an income to escape the vagaries of the stock markets. I have deposited my money buffer in such accounts.

Yet most deposit accounts still have deplorably low rates. And many investors avoid stocks and the capital appreciation they can provide. That means they’re also denying themselves dividends, which is more than icing on the cake.

This mix of valuation and income explains why long-term US investors prefer “dividend aristocratic” companies, such as the food processor Leviathan Archer Daniels Midland, which have record dividend increases.

The UK’s dividend aristocrats, such as insurance giant Legal & General, also know how to be consistently generous.

As Rob Morgan, principal investment analyst at investment management firm Charles Stanley, points out, dividends have accounted for 67 percent of the total returns of the largest UK companies over the past 20 years.

In 2023, AJ Bell predicts FTSE 100 companies will return a record £85.8 billion to shareholders. Most of this will come from Shell, BP and Glencore, the commodities giant. The trio will share a combined £15bn.

However, HSBC intends to be even more outspoken in appeasing Chinese insurer Ping An, its largest shareholder.

In addition to dividends, Glencore and others will be doing billions of pounds worth of share buybacks, which are considered dividends’ cousin. In this scheme, a company buys back its shares, reducing the number in the market to increase the price.

Separate figures from fund administration firm Link suggest that smaller companies, hit by higher borrowing costs, may be less generous this year.

But dividend payments from all UK listed companies could still reach £91.7 billion – just 2.8 per cent down on the peak year of 2022.

This is good news for those in need of an income, many of whom are feeling a lingering sense of hardship after cutting dividends during the pandemic.

But this bounty is also a boon to those who reinvest their dividends. Morgan says: ‘If you had invested £1,000 in the US S&P 500 index 20 years ago, it would have come to £6,361 without dividends, but in £8,384 if the dividends had been reinvested.

‘If you put £1,000 into the FTSE 100 you would have gotten £2,179. But with dividends reinvested it would be £4,577.”

The data is impressive, although those who prioritize sustainability may be appalled at the nature of the industries that are the richest source of dividends.

AJ Bell says the average dividend coverage of FTSE 100 shares is 2.24 times.

Coverage of 2 or higher means the profit is twice the amount of the dividend payment, allowing the company to make capital investments and other projects while maintaining the payout.

If you want to improve your income, it’s important to check dividend coverage and dividend yield (the dividend as a percentage of the share price). The average dividend yield on the FTSE 100 is 3.58 percent, but some voters are bidding more, signaling caution.

For example, the yield of Persimmon is 16 percent. But the homebuilder has to contend with things like the downturn in demand for new homes — and the company’s future dividend policy will tighten.

The difficulty of judging things like dividend yields is one reason why it’s currently tempting to favor one-year bonds from National Savings & Investments and others that pay 4 percent.

Another excuse is the reduction in the value of the dividend income tax deduction from £2,000 to £1,000, effective from April.

The reduction of this concession can be irritating. But as a consolation, it is possible to outsource the search for reliable sources of income – at home and abroad.

Morgan proposes the combination of equity income fund JO Hambro Capital Management UK and M&G Global Dividend.

The investment trust industry has its own aristocracy – the dividend heroes, trusts that have raised dividends for at least 20 consecutive years.

They include City of London, which has a dividend yield of 4.7 percent. The trust has British household names, but also has an international reputation.