Here’s a sobering fact for savers: more than a decade after the financial crisis the average cash ISA still pays just 0.88%. And here’s a couple more: last year 10.8m people nonetheless put a mind-boggling £39.8bn into the tax-free savings vehicle. So much money, so little return.
Today’s low savings rates are like that old joke about the weather: everybody moans but nobody does anything about it. Especially the big high street banks. However, there is something you can do, if you are willing to take on more risk.
You can claim yields of more than 5% a year by investing in some of the UK’s biggest and best-known companies, such as pharmaceutical giant GlaxoSmithKline (LSE: GSK), which has long been one of the most generous dividend income payers on the FTSE 100.
Glaxo currently yields 5.6%, covered 1.3 times by earnings, far more than you will get from any cash ISA or savings account. Stocks like Glaxo could help you build a second income, but they behave in a different way to cash.
First, dividends are not guaranteed. Companies fund these regular shareholder payouts from their earnings, and if those earnings drop or profits fall for any other reason, they are free to stop them (which doesn’t do much for the share price either).
Most companies try to increase their dividend every year, which can give you a rising income (something you don’t get with cash). Unusually, Glaxo has frozen its dividend at 80p for the last four years, as earnings per share (EPS) stalled and even fell, including a hefty 21% drop in 2015. City analysts currently predict that EPS will remain flat at 0% in 2018, then rise 4% next year.
The challenge Glaxo faces is bringing new pharmaceutical treatments to market, which is how it makes its money. It loses out when blockbuster treatments such as lung drug Advair, big in the US, come off patent allowing rivals to pump out cheaper generic alternatives.
In the pipeline
Advair enjoyed a reprieve in February when Glaxo said no generic rival was likely to emerge this year, although the group’s profits are still being squeezed by growing competition for its key asthma and HIV units.
Investors keep a close eye on Glaxo’s drugs pipeline, and will be pleased to see positive results for asthma treatment Nucala while it seeks approval for a new one-tablet HIV-1 treatment through its subsidiary ViiV Healthcare, but disappointed that its new biologic drug for chronic obstructive pulmonary disease was rejected by the US medical watchdog.
Even a £74bn blue-chip behemoth is not without risk as you can see. Glaxo’s share price has gone nowhere fast for five years, and the stock has lost some of its lustre as a result. On the plus side, it trades at just 12.8 times earnings, below the 15 times usually seen as fair value, so may be a bargain.
If buying individual stocks is too risky for you, spread your risk by investing in high-yield investment trusts instead. They can also help you escape the derisory return on cash.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.