Income shares now offer a rare chance to grow our money in the stock market, and maybe to even get rich.
Dividend-paying shares look like great value at the moment, better than they have for a decade perhaps. Because of a lousy year in the markets, these stocks pay their holders even bigger cash returns. Let me explain.
Let’s say a company has a 10p dividend each year. Well, the return I get back comes from the share price. If I buy in at £1 a share then the yield I get is 10%. So far, standard stuff.
If the share price drops to 50p, that same dividend now gives me a 20% yield on my stake. I benefited because the shares went down. Or In other words, I get more money from a dividend if the shares fall in price.
This example is more simple than it works in reality, but I hope it gets the message across: a drop in the markets makes income shares pay out more.
Big payments
After its recent slide, the FTSE 100 offers even bigger payments than previously. There are over 23 companies on the index that offer a yield above 5%, with plenty offering over 8% too.
The FTSE 250 might be even better. It has 73 companies that can give me a yield above 5% and lots over the 8% range.
Compared to other stock markets in the US, Europe or Japan, it’s the same story. Income shares here in the UK have big payouts.
| US | UK | Europe (ex.UK) | Japan | Emerging Markets | |
| Dividend Yield | 1.6% | 3.8% | 3.0% | 2.5% | 3.3% |
Will payouts stay this high? Well, that’s a tricky one to answer. it’s true that the UK is known for its high dividends. But at the same time, we seem to be in a lull in share prices. If UK stocks start to rise then we’ll see lower payments, and the evidence does suggest that they’re lower than their real value.
The CAPE (cyclically adjusted price-to-earnings ratio) is maybe the best measure of value. It tells us how much it costs to buy stocks relative to the profits a company or market makes. And on this data from Schroders, the UK does look undervalued.
A more short-term metric – the forward P/E ratio – looks cheap as well. It’s anyone’s guess what will actually happen, but if it did revert to the mean, then income shares would start paying out less.
Can I get rich with these income shares? It’s possible. If had £30k to play with and could save £250 a month on top, then I think this could build to a number that would surprise anyone who doesn’t know too much about investing.
A tidy sum
I have to remember that investing has risks and there’s no guarantee I’d make the amount I want. I could even lose money.
But if I assume a conservative 7% return from my shares and reinvest all my returns to build to a higher figure, my savings would grow to £522k over a 30-year period. That may not be ‘rich’ but still sounds pretty good to me.
And just to be clear, the shares are the only reason I get to that cash total. Without them, I’d have saved around £120k. That’s about a £400k difference.
