For a short while in 2023, cash was giving UK shares a run for their money. After the Bank of England (BoE) hiked base rates for the 14th meeting in a row in August, savings rates soared.
National Savings & Investments promoted a one-year savings bond paying a fixed rate of 6.2%. Savers were mad for it. It took £7.7bn of cash in September alone, hitting NS&I’s fund-raising target for the whole year in a single month.
It was also possible to get a five-year fixed-rate savings bond paying 5.85%, which looked a better deal to me. That return already beats inflation, which fell to 4.6% in October. It may continue to beat inflation all the way to 2028.
Deposits have had their day
Cash was king for a month or two. But I reckon its moment has already passed. The BoE has held base rate at 5.25% at its last two meetings, and nobody is expecting an increase at its next one on 14 December.
Governor Andrew Bailey may be pretending otherwise but I think savings rates have peaked and may soon start to fall. And it’s beginning to look like stocks and shares are just getting going.
Investors have been waiting all year for peak interest rates. It’s been a long time coming but now it looks like we might be there. The FTSE 100 jumped 1.52% in November, while the S&P 500 climbed more than 8%.
Investors are now dreaming of a Santa rally. History shows that December is the best month of the year, with global equities rising 74% of the time over the last 50 years, according to research from Bestinvest.
I’d welcome a share price rally, but it’s not essential. I spent the summer and autumn loading up on high-yielding FTSE 100 dividend shares, and expect them to generate a decent return even if markets continue to stumble.
Income winter warmer
Two of my recent stock purchases will generate an average yield of 7.85% between them. The first is housebuilder Taylor Wimpey, which trades at a dirt cheap valuation of just 6.9 times earnings while yielding a blockbuster 7.3%. The second is insurer Legal & General Group, which is even cheaper, with a P/E of 6 times and yields 8.4%. These returns smash cash.
It’s important to remember that yields are never guaranteed. They can be cut if the company doesn’t generate sufficient earnings to pay dividends. However, both shareholder payouts are covered twice by earnings, a level generally seen as safe.
Their share prices have struggled lately, which is hardly surprising given the bumpy ride stock markets have suffered over the past few years. Yet I think both have plenty of scope for growth, when interest rates fall and the economy starts to pick itself up. Of course I could be wrong and, unlike cash, my capital is at risk.
If I’m right and interest rates do start falling next year, savings rates will sadly but inevitably follow. By contrast, stock markets should rise and, with luck, my dividend income will keep flowing. Again, there are no guarantees, but I’m throwing all my spare cash at UK shares today, while they’re still cheap.
