With the announcement that the amount covered under the Financial Services Compensation Scheme will fall to £75,000 from £85,000 in January 2016, life for savers just got a whole lot harder. The reason for the drop in cover is, of course, a weak Euro, with the limit of €100,000 being worth less in sterling than it was five years ago, when it equated to £85,000. As such, savers will now need to ensure they have £75,000 or less at a single institution, or else risk losing part of their savings if that bank goes bust.
A consequence of low interest rates and the above is likely to be greater attention on high-yielding shares. Clearly, they can fill a gap in terms of providing a much more generous income than those available on cash balances. For example, Shell (LSE: RDSB) (NYSE: RDS.B.US) currently yields a whopping 6.7% after a fall in its share price of 18% since the turn of the year. And, while the company’s bottom line is coming under pressure from a lower oil price that looks set to stay for a number of years, its dividends appear to be well covered and very sustainable.
In fact, looking ahead to next year, Shell is forecast to post a growth in its bottom line of 26%. As such, its dividend coverage ratio is due to rise to around 1.35, which indicates that its dividends are not only very affordable, but have the scope to rise. That’s especially the case if, as expected, Shell continues to restructure its business via divestments and acquisitions which, in time, should provide its bottom line with an even greater boost.
However, not all companies which have high yields offer such impressive dividend prospects as Shell. For example, gambling company, Ladbrokes (LSE: LAD), is slashing dividends in the current year and, while this appears to be a sensible step in order to improve the company’s financial standing, it means that last year’s yield of 6.8% now stands at 4.9%. And, while earnings growth is set to be positive next year as the company implements a new strategy to stimulate its bottom line, dividend coverage of just 1.08 seems rather tight, which means that there may be better opportunities elsewhere for income-seeking investors.
Similarly, property investment business, Redefine (LSE: RDI), is set to pay almost all of its profit out as dividends in the current year. While this may not be a problem at a time when its bottom line is growing, it may lead to a shortfall in more challenging years. Furthermore, the current purple patch for property companies is unlikely to last in perpetuity, with interest rates set to rise over the medium term and the European economy (to which Redefine is exposed) likely to continue to be an uncertain environment. As such, and despite yielding 6.3%, there may be better options than Redefine elsewhere.
