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Paul Farrow: Dull pays dividends

When Isas were launched in 1999, there was widespread confusion due to the mini and the maxi division. This paper even ran a story referring to a survey that showed that many people were mixing up Isas with mad cow disease (BSE) and the crack fighting force the SAS. A little far-fetched admittedly but there was no doubt that maxi and mini Isas and the different investment limits bamboozled some.

Despite a topsy-turvy life, Isas have been holding their own of late. Admittedly, sales fell in 2011 to £3bn but that was still the third best year since 2001, when they went through the roof thanks to the technology boom.

While many people scoff at the so-called Isa season, it is apparent that savers are getting the most out of the tax breaks. According to brokers, there are dozens of Pep and Isa millionaires across the country and not all of them are top-rate number-crunchers that know their EBITDA from their p/e.

It makes a pleasant change to hear that savers are making a mint out of investing rather than listening to tales of investors nursing bumper losses and who have been scared off from investing in the stock-market for life.

Having talked to several of these millionaires, it is evident that they have made their biggest gains by investing at the smaller end of the FTSE scale. Many admit that they got a bit lucky too with their picks. But at the heart of these million- pound-plus portfolios are good old-fashioned British stocks that are also renowned dividend- payers – Rolls-Royce was one stock that cropped up on more than one occasion.

Dividends have certainly helped the Isa millionaires.

One couple from Kent told me how they accrued a combined pot of £1.3m having invested around £190,000 each since the first year of Peps in 1988. It now pays them a handsome income of £57,000 a year.

Ivan McKay, a livestock farmer from Ireland, cannot believe his luck on the amount of income he gets after snapping up a utility stock two decades or so ago. He bought Scottish & Southern Energy in 1989 at 240p (the shares now stand at £12.81) and this year it is paying a dividend of 80p – that’s a return of 33 per cent in itself, he told me proudly.

Another Isa millionaire has just bought Imperial Tobacco for the first time. Why? Because it looks undervalued, has an attractive yield and is unlikely to go bust.

Dividends are certainly back in vogue and it is a reason why many equity income funds are on the leader boards again. But why did private investors ever doubt them? Until the banking crisis, they delivered positive returns consistently over two decades – and lest we forget that many of these funds are managed by vastly experienced, wily, old managers who have seen a thing or two.

The pulling power of dividends was once again high-lighted in the latest Barclays Equity Gilt Study published this month. It shows that £100 invested in shares in 1899, with dividends reinvested would be worth £20,228 in real terms compared with being worth just £274 if the £100 had been invested in a cash savings account.

So the secret is out. If we want to make a million, we should look no further than dull British companies that pay consistent dividends.

Mind you, one Isa millionaire who I spoke to was rather reluctant to shout about his fortune from the rooftops. With the Government rumoured to be looking at cutting the pension allowance, some fear the Treasury will get wind that savvy investors are keeping millions of pounds away from the clutches of the taxman. And if it does smell a rat, it might look to put a cap on how much you can invest in all your Isas too.

Paul Farrow is personal finance editor of the Telegraph Media Group

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  1. Yes, income is king, no doubt about it. However, even the best income funds have suffered some times alarming capital losses over the past few years and by no means all investors want 100% equity portfolios.

    We shouldn’t overlook the importance of diversification, which means a broadly based asset allocation strategy, a key element of portfolio construction. So that means that most portfolios should hold a healthy leavening of Fixed Income funds, including Gilts, investment grade Bonds, high yield Bonds, perhaps International Bonds and maybe even some Emerging Market Bonds, depending on the investor’s volatility tolerance. For further diversification still, one might also look to Property funds, notwithstanding their recent misfortunes.

    Most of those types of fund are good income generators, often better than equity funds, with lower volatility and low correlation with equities.

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