Dividends are now the only game in town

Today, savers are playing a game they can’t win. With the average easy access savings account now paying just 0.5%, according to, they’re onto a surefire loser. Inflation is low but not that low at 0.6%, which means that millions are seeing the value of their cash eroded in real terms.

Wicked game

Bonds aren’t much better, with UK 10-year gilts yielding just 0.56%. The UK property market looks vulnerable to Brexit fallout, while former Chancellor George Osborne’s parting tax shots at buy-to-let investors have wiped out many of its attractions.

Where cash, bonds and property are concerned, the game looks increasingly rigged. Dividend-paying stocks, by contrast, are a far more attractive bet. The odds are pretty good for a start, with the FTSE 100 currently yielding 3.71%, which is almost 15 times base rate and seven-and-a-half times the average savings account.

Check these top yields

You can get an even higher yield by targeting individual companies, with big names such as BP, HSBC Holdings, Legal & General Group and Royal Dutch Shell all yielding more than 6%. Obviously, this is riskier than leaving your money in the bank, with oil company yields particularly vulnerable as profits are squeezed. Which is why it’s best to spread your risk between a number of companies, either by building your own portfolio of stocks or if that’s too complicated through a low-cost FTSE tracker.

One of the big attractions of company dividends is that most businesses aim to increase them over time, as the business grows and cash flows increase. This means that with luck, you’re locking into a rising income stream, so today’s yields will look even more impressive in future years.

Say you buy a company that costs £1 per share today and pays a dividend of 5p. The yield is 5%. Let’s say that next year the dividend is hiked to 6p and then 7p the following year. Effectively you will be getting a yield of 7% on your original money, plus any share price growth on top. By reinvesting those dividends you pick up more stock and get more dividends, accelerating the compounding effect.

Brexit bonus

It’s important to remember that company dividends are never guaranteed, and are vulnerable to a cut if profits flounder. UK dividends are coming under pressure today, falling 3.3% year-on-year in the second quarter, according to the latest Henderson Global Dividend Index. Standard Chartered, Anglo American, Barclays and WM Morrison were among those making steep cuts.

Yet I’m not worried, because dividends still offer a far better return than you can get elsewhere, and will almost certainly continue to do so. Q2 dividends total $33.7bn, up 7.7% over the year, thanks to large special dividends from GlaxoSmithKline, Intercontinental Hotels and others. Better still, UK dividend investors have benefitted from Brexit. Many top UK companies pay their dividends in dollars and in some cases euros, and these are now worth more when converted back into sterling.

Generous yields, compounding benefits and the potential for rising yields make dividend investing about the most enjoyable game that any investor can play right now.

As you can see we love a dividend at the Motley Fool, but what we REALLY love is a rising dividend.

Our analysts reckon they've found a top dividend stock with great prospects, which they name in our NEW report A Top Income Share from The Motley Fool.

While many leading UK companies are slashing their dividends, this FTSE 250 star accelerated its payout at astonishing speed in 2015. Our analysts are so impressed by this company’s ambitious growth plans they're happy to call it one of the best income stocks on the market today.

Click here to enjoy this FREE, no-obligation wealth report. It will be yours in moments and won't cost you a penny.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays, BP, HSBC Holdings, and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.